Brokers Should Unlock Their ARSs

Bloomberg's Darrell Preston has found three investors in auction-rate securities who have found buyers for their holdings. That's the good news. The bad news is that these investors' brokers are refusing to let the owners sell.

Franklin Biddar bought $100,000 of ARSs through Bank of America; Chris Longman bought $375,000 of ARSs through UBS; and David Wilner and Maxwell Stokes bought $200,000 and $50,000, respectively, of ARSs through Wachovia. All four of them would like to sell their holdings; three of them have buyers lined up; and none of them are being allowed to sell.

Why can't the banks in question simply do as their clients are asking them to do? Well, they could, if they wanted to. But they don't want to, because that might open them up to legal liability:

"By allowing customers to sell at a discount, the banks allow customers to establish damages," said Bryan Lantagne, the securities division director for Massachusetts Secretary of State William Galvin. Lantagne is head of a task force for nine states looking at whether brokers misrepresented the debt as an alternative to money-market investments.

This definitely has the ring of truth to it: I'm sure it's the real reason that the banks aren't allowing their clients to sell. And it stinks. It's not the banks' money, after all, and they have no right to hold on to it against their clients' wishes. Will the clients thereby establish damages? Quite possibly, yes. But if you've screwed up once, it's not generally advisable to compound the error by acting unprofessionally a second time. (And if you didn't screw up originally, then you have nothing to fear from your clients taking a loss: clients take losses every day.) These orders should be filled, forthwith. And if they are, a much more liquid secondary market might even start to spring up in such things.