Owning things you don’t understand August 15, 2012 at 3:00 pm
Dealbreaker has an interesting article on a case involving Wells Fargo mis-selling SIV-issued CP to a muni. They go through the specifics of the case (which are outrageous – the salesguy didn’t know what a SIV was when he sold them the paper), but then they riff on the structure of the system that let this happen.
If you think it’s a bad thing that various municipalities got singed when a bunch of overlevered investments in subprime securities blew up – and you do, right? what are you, a monster? – then where do you place the blame? The municipalities? I mean, sure, absolutely, they were dopes, but their job was to be dopes – they thought they could rely on layers and layers of paid advisors who seemed to owe them something. The people who built the SIVs? Yes, they were clearly arbitraging the inattention of various other parties in order to maximize profits, so, bad on them, except: they were traders, and arbitraging others’ inattention (within antifraud rules, etc.) was their job. The rating agencies? Absolutely: they were dopes too, but their job was not to be dopes, so bad work – but bad work protected by the First Amendment.
Brokers who put unsophisticated customers into these trades are a good target: unlike structurers and raters who can hide behind legal disclosure, the brokers’ job was actually to find suitable investments, so it’s fair enough for them to get in trouble when they didn’t even try to do that. So good work on the SEC for fining them – and for fining them an amount that, while pretty small, is still 100x what they made on selling this paper.
I have to agree with this. There’s nothing clearly evil about structuring SIVs. The ratings agencies could have done a better job, but given that there seems to be no legal sanction available to use against them, I guess we will have to let them lie. The people who are really culpable are the ones the muni paid to do their due diligence for them, and who should have been acting in their interests. But, as so often with professional advisors, there doesn’t seem to be enough at stake; sure, a fine is nasty, but shouldn’t the sanction for advising someone to buy something that you don’t understand and that isn’t suitable for them be higher than writing a cheque?