Pain in the ARS

Why can't we ever get lawyers like that? I ask on behalf of all Mainers, who can only watch with envy as Massachusetts Attorney General Martha Coakley adds another notch on her belt. This time it is UBS Financial Services Inc., the latest Wall Street firm to be nailed for marketing "enhanced" cash investments to municipal entities. As reported on the front page of this morning's Boston Globe, UBS has been coaxed (sorry, couldn't resist) to repay $37 million to 17 cities and towns for auction-rate securities (ARS) for which there is no longer a market. Towns had been parking excess cash in ARS, which rolled over weekly or monthly until the market seized, to juice returns.

The settlement with UBS follows an earlier deal with Merrill Lynch whereby the City of Springfield was refunded $14 million for money invested in collateralized debt obligations (CDO). In each case, the broker/dealer was forced to admit that the investments in question were not permitted by state law, which restricts municipal cash to highly liquid accounts that guarantee the principal. Also in each case, the broker/dealer admitted only to a one-time misdemeanor. "UBS is pleased this matter has been resolved," said a company spokesperson.

Maybe it has, maybe it hasn't. Massachusetts Secretary of State William Galvin has issued subpoenas to UBS, Merrill Lynch, and Bank of America regarding the sale of ARS to individual investors and businesses. Conducting its own investigation is the Securities and Exchange Commission. If a pattern of abuse is revealed, then aggrieved investors, public and private, will be lining up for restitution.

The State of Maine continues to wait for resolution of the MainSail II fiasco. Creditors were alerted in March that "no valuation of the Issuer's asset portfolio [...] provides any reasonable expectation" that senior secured parties will get all their money back. Other investors may get nothing. The assets (which have shrunk in value by two-thirds since Maine jumped into the pool) are now in receivership, so the eventual outcome for investors will be, if not entirely satisfactory, at least orderly. Price discovery awaits.

Meanwhile, Maine Treasurer David Lemoine, still ticked off at Merrill Lynch for pushing the MainSail investment, has blackballed the firm. The State will be selling nearly $120 million in general obligation bonds later this month, and Merrill will be getting no piece of that action. “Until the Mainsail II matter is fixed and I am satisfied that the Merrill Lynch brokerage culture is trustworthy," said an exasperated Lemoine, "this office will not bring Merrill Lynch into any of our bond deals.” Take that, Merrill Lynch.