The “Sophisticated” Regulators at the Sec and FINRA

The Wall Street Journal ran an impressive page one story over the weekend about how the auction rate securities debacle is hurting the economic recovery.  Some 400 companies are holding more than $20 billion in securities that can’t be unloaded or are worth dramatically less in value. These companies claim they would use this money to bolster their businesses if it were liquid.

Unlike individual investors who regulators forced Wall Street to make whole, companies who bought auction rate securities pretty much have to fend for themselves. Under the terms of regulatory settlements last year, securities firms who sold auction rate securities to corporations only have to make “best efforts” to make these companies whole because corporate treasurers are supposedly “sophisticated” and understood risks relating to auction rate securities.  “Best efforts” is a nebulous term that in practicality means “as little as possible.”

At the end of the day, the auction rate securities market was rigged and its beyond me how or why corporate treasurers should have been wise to the wrongdoing.  Moreover,  if corporate treasurers should have known about the wrongdoing, why is it that the SEC and FINRA weren’t on to the scheme, particularly as the SEC launched an action against some 15 Wall Street firms in 2006 for rigging the auction rate securities market (link to settlement announcement).

Regulators were wrong to exempt institutional investors from the auction rate securities settlements.  Admittedly, redeeming $20 billion in securities would be a prohibitive undertaking. But Wall Street made the auction securities mess.  They should be forced to clean it up - all of it.