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Think Your Cash Is Safe? Better Check With Your Broker
Posted Mar 31, 2008 02:15pm EDT by Henry Blodget in Investing, BankingFrom Silicon Alley Insider, March 31, 2008:
On Friday, UBS became the first major investment firm to start "marking down" the value of Auction-Rate Securities held in client accounts (translation: each $1 will now be worth $0.80-$0.95). Why does this matter? Because most people who own Auction-Rate Securities think they own "cash."
Auction-Rate Securities were sold for years as "cash on steroids"--securities that could be sold any time but paid, say, 4.5% interest while chumps who owned money-market accounts were stuck earning 4%. Many people who bought Auction-Rate Securities--and, it turns out, many people who sold them--assumed the extra interest was just a freebie, a riskless bonus discovered by a talented financial advisor. But, of course, it wasn't.
In recent months, the credit crunch has frozen several sectors of the Auction-Rate Securities market (see the comments here for details), making the securities difficult or impossible to sell. Now, banks like UBS are responding by cutting their value--news that will likely be greeted with shock by many UBS clients, who thought they were holding cash.
There are four key lessons here:
1. There's no free lunch. That "bonus" interest your broker found for you? You're only getting it in exchange for increased risk. On Wall Street, there is NEVER a free lunch, so don't get duped into thinking you've found one.
2. "Cash-like" securities are not the same as "cash." So next time you hear your advisor say "just like cash!", hang up the phone.
3. Your broker/advisor may not know that he or she is selling you something that could lose value. This emerged on Friday, shortly after the Journal story about UBS ran (see Comments). Many brokers who sold Auction-Rate Securities believed that they were safe and are shocked as their clients about what has happened. These brokers are now pointing their fingers at the product people in their firms, who told them ARSs were safe. (This, by the way, is a common misconception about Wall Street: The folks who screw you aren't actually trying to screw you--they're just inadvertently screwing you.)
4. Just because something has never happened before doesn't mean it won't happen soon. The reason your broker and you thought ARSs were a free lunch is that they had seemed to be--for decades. Alas, as the saying goes, past performance does not guarantee future results.
Want your cash to be as safe as it can be? Hold it in FDIC insured savings accounts or money-market funds composed of US Treasury bills. Sure, the interest rates stink. But there's no free lunch.
More: UBS Hoses Clients, Cuts Value of Auction-Rate Securities; Lawsuits-a-Comin'
41 Comments
Yahoo! Finance User - Monday March 31, 2008 02:55PM EDT
Sue them, sue them all ... give your money to the lawyers ... they need it to send their children to law school and pay their BMW and Lexus payments. Money is the root of all evil. It's all Bush's fault. A bird in the hand is worth ... a fortune if you can find a sucker to buy it. Obama will deliver us from evil.
Yahoo! Finance User - Monday March 31, 2008 03:00PM EDT
In what other industry can you get a bonus by being incompetent?
matt m - Monday March 31, 2008 03:05PM EDT
and how exactly is obama going to "deliver us from evil?"
Helen and Jerry - Monday March 31, 2008 03:12PM EDT
If you think Paulson will seek to regulate funny money, I can sell you a nice old bridge to collect tolls. Its Wall street, after all that comes up with those creative ways to get your money. Who came up with the idea of buying any mortgages wholesale from banks and repackaging them as AAA rated(!!!) bonds. This way you scam so-called investors as well as speculators. The banks are scot free as sellers, besides they are regulated (dirty word) which the secdurity sellers are not. See above reference to Paulson.
philip j - Monday March 31, 2008 03:15PM EDT
by chasing the money lenders out of the temple?
Lucidious - Monday March 31, 2008 03:20PM EDT
The bigger the risk the bigger the gain. If at anytime there is an increase in profits it normally will increase risk. I can go to the blackjack table and get 100% or more return on my investment. I just do so at a very high risk.
Yahoo! Finance User - Monday March 31, 2008 03:26PM EDT
and how is this Bush's fault??? Poor guy . . . .invades a couple of countries, and every problem ever discovered is his fault. I did not read the prospectus of an investment I made . . . Bush's fault. Did not have enough milk for my cereal this morning . . . Bush's fault.
Yahoo! Finance User - Monday March 31, 2008 03:27PM EDT
and how is this Bush's fault??? Poor guy . . . .invades a couple of countries, and every problem ever discovered is his fault. I did not read the prospectus of an investment I made . . . Bush's fault. Did not have enough milk for my cereal this morning . . . Bush's fault.
Rene C - Monday March 31, 2008 03:27PM EDT
How can Obama saves us from evil when he gets his ideas and orders from an anti American????
Yahoo! Finance User - Monday March 31, 2008 03:27PM EDT
Nobody is saying if and when we will get our principal back. My broker told me "your are getting paid well to wait". No class actions, PLEAAAZE! The lawyers end up with all the money.
jerry - Monday March 31, 2008 03:28PM EDT
Just because you have been screwed by your lawyer, don't blame the universe. Money is the "root" so we only have ourselves and our greed to blame. You can't blame 'W' for your failings. Was that Osama or Obama or yo Mama that is going to deliver us?
Yahoo! Finance User - Monday March 31, 2008 03:30PM EDT
Is this the same Henry Blodget that was charged for securities fraud, settled out of court and was banned for life from the securities industry?
David - Monday March 31, 2008 03:30PM EDT
It is about time someone exposes how there are no free rides. I am so sick of being pitched on track records...what happened to someone else's money! I'm surprised you didn't mention www.fundgrades.com which is the only mutual fund and ETF website I know of that exposes where the price is for that otherwise free lunch being sold.
michael s - Monday March 31, 2008 03:35PM EDT
Is the Henry Bloggett that posted that messege the same Henry ZBlodgett from Merril Lynch who had strong buys on Excite at Home among others? If it is, then I would suggest to you that nobody should take his advice on anything period!
Yahoo! Finance User - Monday March 31, 2008 03:35PM EDT
'I didn't know' always works for brokers. http://www.safehaven.com/article-8862.htm
Richard M - Monday March 31, 2008 03:36PM EDT
EDT did your tongue poke a hole in your cheek ?
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Harry C KB2NMH - Monday March 31, 2008 02:44PM EDT
Any Class action suites?