Financial Institution Preferred Stocks Blow-Up: Individual Investor’s Next Nightmare

by Jacob Zamansky on October 1st, 2008 at 10:23 am : Comments 000

Based on the calls we are receiving, an alarming trend is emerging that equals - if not trumps - the magnitude of the auction rate securities scandal.  I’m referring to a growing number of investors with complaints that their broker improperly recommended purchasing preferred shares of financial firms over the past few months.

Financial institutions such as Fannie Mae, Freddie Mac, Washington Mutual, Merrill Lynch, AIG, Wachovia, among many others, issued preferred shares which offered significant dividend payments.  Brokers pitched them as a fixed-income equivalents which attracted retirees seeking stable investments to generate revenue for living expenses.  But after the credit crisis started in mid-2007, financial stocks turned obviously speculative.

The losses sustained by mom-and-pop investors could be staggering.  According to the Wall Street Journal, the combined market cap of the top 15 S&P financial companies was $1.3 trillion, which has been reduced to $1 trillion.  That’s an evaporation of about $300 billion, and it appears we haven’t hit bottom yet.  Many of the so-called experts don’t understand that for every shot-gun wedding or emergency liquidation the Federal government orchestrates on Wall Street, retail investors wake up to gaping holes in their retirement nest eggs.

At a minimum, these investors should have been told to diversify out of preferred shares of financial firms; the fact that some retirees were told to buy more in recent months is truly a horrifying breach of trust.

I can already hear the cat calls.

“Investors should have known better,” they like to say.

But I’ve seen this over-and-over again.  First it was the dot-com stocks, then it was auction rate securities; now its time to worry whether preferred shares of financial firms are next.

Filed under Financial Stocks, Securities Arbitration
and bank stock losses, Fannie Mae, Freddie Mac, preferred shares, Wachovia