« Beating Your Biggest Money Worries | Main | Apply the 40 Plus Formula to Advance Your Career »
What’s the Definition of “Safe?”
By JLP | February 14, 2008
This is unbelievable.
From Debt Crisis Hits a Dynasty ($) in today’s Wall Street Journal:
When M. Brian and Basil Maher sold their family’s shipping business last July for more than $1 billion, they quickly put the money in a safe place.
Or so they thought.
The two brothers handed much of it to Lehman Brothers Holdings Inc. with marching orders to make only the most conservative, cashlike investments. Within weeks, however, they had lost access to more than a quarter-billion dollars.
“We didn’t think we were taking risks,” says Brian Maher, 61 years old. “We read about all the troubles in the credit markets and said, ‘I’m glad we’re not invested in that stuff.’ It turns out, we were.”
The Mahers rank among the earliest victims of “auction rate” securities, a once-obscure type of bond now sending shock waves through broad swaths of the U.S. economy. Auction-rate securities—an unusual type of long-term bond that behaves like a short-term bond—have become a keystone of modern finance. They are routinely used to fund everything from college student-loan programs to municipal road-and-bridge projects.
Later, the article goes onto explain auction-rate securities in more detail:
Auction-rate securities usually are long-term bonds with interest rates that are reset periodically (usually once a month) at an auction. Because the auctions happen so often, the bonds traditionally were much easier to buy and sell than other forms of long-term debt. Auction-rate securities worked well for over 20 years and were regarded by Wall Street as cashlike investments, since they were highly liquid and highly rated.
But if buyers stop showing up for auctions, they become tough to sell, or even to value.
So, action-rate securities were believed to be highly liquid and highly rated. But, were they safe? NOPE!
From reading the article, it appears the brothers did everything right:
Mr. Liu [their advisor] and the Mahers drew up a basic list of financial objectives. The first one, according to a letter the family sent the banks: “Preserve capital.” The second was to “provide sufficient liquidity” and third was “capture a market rate of return based on [the brothers'] investment policy parameters and market conditions.”
The brothers are trying to get their money back from Lehman. Lehman of course, doesn’t want to pay it back. I can see both sides of this issue. From the article, it sounds like Lehman was doing what they were supposed to do. But, did they have a responsibility to see that the auction-rate securities were not safe?
Opinions? If you would like to read the entire article but don’t have a WSJ subscription, let me know and I’ll email you a copy of the story. I think the WSJ will allow me to mail out 5 copies so it’s first-come-first-serve.
Topics: Miscellaneous |