August 22, 2008 – 5:33 pm

Merrill Lynch, Deutsche Bank and Goldman Sachs came into the fold Thursday as all three settled with New York Attorney General Andrew Cuomo in the auction rate securities suit. For the majority of investors, the glass is very much half empty. First some numbers:

  • Goldman Sachs will pay a $22.5 million fine and buy back about $1.5 billion in auction rate notes, while
  • Deutsche Bank will pay a $15 million penalty and buy back about $1 billion of the notes.
  • Ensemble Merrill Lynch will buy back between $10 billion and $12 billion and pay a $125 million fine under the agreement reached with Massachusetts and New York, and the SEC.

While Merrill Lynch was forced to take back the biggest chunk of regurgitated auction rate securities, its fraud was also the most egregious. In early August, Merrill said that it would buy back the securities from retail clients, but the announcement was a faint attempt to preempt a harsher settlement that would be imposed by regulators. When clients who had already cashed out at a loss tried to get reimbursement, they found a door slammed in their face. Witness:

But when Merrill “voluntarily” announced plans to buy back securities from retail clients last week, it made no such provision for clients who had already cashed out at a loss.

“It’s like Merrill said, ‘Let’s jump before they push us, and maybe we’ll hit the awning instead of the street,’ “

And they were right. Those who cashed out with a loss were left out in the cold.

Merrill agreed to buy back $7 billion of untradable debt instruments from investors, small businesses and charities who bought them from the bank, the SEC said Friday .

The figure excludes ARS that have already been redeemed by the issuer, such as a municipality, according to an SEC official. That explains the difference between the SEC amount and the $10 billion to $12 billion in the agreement announced by New York State Attorney General Andrew Cuomo on Thursday.

Even though the move left many in the lurch, at Merrill Lynch they are as happy with the deal as Andrew Cuomo. Here’s how Cuomo congratulated himself:

“We have certainly addressed the bulk of the crisis here in terms of the number of people and established a strategy for the total resolution of the problem,” the attorney general, Andrew Cuomo, said in an interview.

The CEO of Merrill Lynch also emphasized a strong friendship with regulators:

John Thain, chairman and chief executive of Merrill Lynch, said he was pleased to reach an “amicable resolution” with regulators and glad that the bank’s “clients would have the certainty of a favorable resolution to this unprecedented liquidity crisis.”

Favorable is right, if you mean from the bank’s point of view:

New York Attorney General Andrew Cuomo’s auction-rate securities settlements with Wall Street banks show that the man who bills himself as the “people’s lawyer” favors savers over shareholders.

The almost $35 billion of frozen debt that Citigroup Inc., UBS AG, JPMorgan Chase & Co., Morgan Stanley and Wachovia Corp. agreed to repurchase covers less than 18 percent of the $200 billion Cuomo last week estimated was outstanding, and is targeted at individuals, charities and small businesses.

Then Thain, who took the rare step of meeting personally with Mr. Cuomo, simply couldn’t restrain himself. (WARNING: This can make you sick.)

“We are pleased our clients have the certainty of a favorable resolution to this unprecedented liquidity crisis,” Thain said in a statement.

Well you can believe Thain about as much as you would Cuomo. Of course the people’s lawyer cares about savers, individuals, charities and small businesses. At least he would like you to think he does. If we were cynical we’d even think he’s trying to gloss over the other 82 percent of the $200B that the banks would otherwise have had to pay. If Bloomberg and the Wall Street Journal were doing their jobs, they might mention this.

Lest Mr. Cuomo be confused with Robin Hood, let’s be clear: the crime here is fraud, not being rich. So wealthy defrauded investors are intrinsically deserving of a lower level of justice than identically defrauded retail investors? Well, that’s inside out of the way things are usually done, but we’d bet the banks would rather pay 18 percent to the puny pups than 82 percent to the big wolves. Is it true that wealthy investors are inherently no good and deserve to be defrauded?

“A lot of institutions were lied to by their brokers, and brokerage firms put their own interests ahead of their institutional customers,” said Jacob Zamansky, a securities lawyer at Zamansky & Associates in New York who represents institutional investors in auction-rate cases. “Cuomo was run over in his haste to get a settlement by these major firms.”

Securities lawyer Zamansky said many of the institutions he represents will go to arbitration to seek damages for “fraudulent” sales of auction-rate securities.

“I think it’s outrageous that the firms are going to wait two years to deal with the liquidity for institutional investors,” Zamansky said. “These are companies that have to make payroll, that have to make investments. Some of the companies can be out of business by then.”

Well, at least Mr. Zamansky seems to have the right idea, even if the financial media doesn’t. As for the SEC, those clowns sound more like the lapdogs than watchdogs:

The U.S. Securities and Exchange Commission reached an $8.5 billion agreement with Merrill Lynch & Co. to settle allegations the firm misled investors when marketing auction-rate debt.

Merrill will buy back up to $7 billion in securities from individual investors, small businesses and charities and take steps to cover their losses, the SEC said in a statement today. The bank must also use “best efforts” to help other businesses and institutional clients unload about $1.5 billion in frozen debt, the agency said.

“Merrill Lynch’s conduct harmed tens of thousands of investors who will have the opportunity to get their money back through this agreement,” the SEC’s enforcement chief, Linda Thomsen, said in a statement.

Oh gosh, you mean “try their best.” Yeah, thanks for nothing, Linda Thompson. Did Thain meet with you too?

Let’s see if we can figure how this all got worked out. Hmm…. Hmmmmm… Sensing political pressure or political opportunity, Cuomo launched an investigation at the big banks and dug up some damaging dirt. Let’s hear what the grapevine has to say:

Securities firms have little defense against regulators because of incriminating documents and the risk to their reputations, said William Shepherd, a Houston attorney whose firm, Shepherd, Smith Edwards & Kantas, has met with more than 500 investors holding the securities.

“The regulators had these firms dead to rights,” said Shepherd, who worked as a bond market salesman in Texas for 20 years. “All the firms will be shamed or forced to do something, even Goldman which seems to be saying that all of their clients are rich and sophisticated.”

With the heat on, the big banks sat down with Mr. Cuomo to discuss his political ambitions and whether or not they would push back Spitzer style or behave more “amicably,” to quote Thain. That’s where a deal was made in everybody’s best interests, and what began as an aggressive effective investigation and punitive legal action morphed into a protect-the-big-banks sham. It’s the same age old scam to protect your big billionaire’s first.

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