Tom James apologizes for auction rate security purchases
Tom James apologizes for auction rate security purchases Tampa Bay Business Journal - by Margie Manning Senior Staff Writer
Clients of Raymond James Financial Inc. have substantially reduced their holdings of auction rate securities.
The firm’s clients currently own about $1 billion in auction rate securities and auction rate preferred securities, less than half the $2.3 billion in securities they owned as of Feb. 12,2009 Thomas James, chairman and chief executive, wrote in a Jan. 2 letter.
Auction rate securities are investment vehicles whose interest rates are reset through periodic auctions. In February, the auctions began failing en masse, meaning there were more sellers than buyers, and the securities became nearly impossible to trade.
It was the first time in almost 20 years that there was a significant number of failed auctions, James wrote in his letter, which was filed with the Securities and Exchange Commission Monday.
For clients who purchased the securities through Raymond James, “I apologize for being involved in your purchase of these securities,” said James.
Several firms, primarily underwriters of the securities, have begun to repurchase the securities, and James said he had hoped most of them would have been refinanced by now. However, the lack of liquidity and credit in the financial markets has yet to be alleviated in spite of regulatory efforts, James said.
James said Raymond James has not repurchased the securities it sold because it does not have access to the needed financing at this time to buy back anything near the $1 billion outstanding. However, he said the company might be able to get a bank loan to buy back the securities when it becomes a bank holding company, a process it expects to complete by June.
James also said that if the company could buy back the securities, regulators would not give Raymond James any “regulatory net capital” credit for the securities, because they are illiquid.
“The illiquidity of auction rate securities is one of the manifestations of the ‘perfect storm’ in the financial markets,” James wrote.
James also disclosed that he personally owned a large number of auction rate securities on Feb. 12, when the auctions failed, and still owns a large number. “We will redeem all customer holdings prior to redeeming the holdings of our employees,” he said.
Meanwhile, the securities are well-collateralized with plenty of coverage to pay their appropriate returns, and in most cases, clients are receiving a higher rate of interest than the contract rate, he said.
Raymond James Financial (NYSE: RJF) is a financial services firm headquartered in St. Petersburg.
This story from TBBJ is slightly over a year old. I believe the ARS balance at that time was $1B, not $2.3B as stated on this post. Not sure what the current balance is but it was reported at around $800M on the 9/31/09 YE report. There should be an update soon on the 1st qtr report.