I have to say that in this debate between Andrew Cuomo, the NY attorney general, and Charles Schwab, I’d rather talk to Chuck than Andy.
When the auction rate security market failed last year, it was a big deal. I remember my brother in law—a broker at the new Morgan Stanley Smith Barney—trying desperately to get clients out of those securities. And I remember him doing so before the market failed out of concern that they weren’t quite as liquid as they were marketed to be. When clients had their money frozen, money that was to pay tuition for their kids or a room addition or vacation, they were forced to find other ways to pay for what they assumed they had the money for. The money was/is still there. Investors just can’t get to it.
Other brokerages caved to the AG and settled. Not Schwab, who says it isn’t their fault the market failed, and they can’t be held responsible when investors take risks and their investments don’t make money. Or, in the case of the auction rate securities, the investments make money but aren’t liquid.
Schwab’s argument, as made by Mr. Schwab himself, is a good one:
Though this market operated smoothly and reliably for over 20 years, it is a market that we had no direct involvement in establishing or maintaining. It’s a market where roughly 90% of the clients who invested in these securities came to Schwab asking us to locate and make available these investments for them. We did not create the products, actively market them, and had no involvement in the events that led to the collapse of the Auction Rate Securities market.
The larger point, however, is this: “The issue at stake here is whether independent investors should be allowed the freedom to choose what they are allowed to buy, sell or hold. Or should the government try to enforce a guarantee against market risk through regulation or lawsuits like the attorney general has brought against us?”
As a Christian, I believe that I am responsible for the use of my money—whether I’m spending it (on consumer products or to buy equity in a company) or lending it. I want to be faithful to that responsibility. I’m suspicious that if the government begins determining what I can and can’t invest in, 1) my options won’t reflect my values, 2) my options will be subpar, 3) my options won’t reflect my risk tolerance but will reflect the government’s willingness to cover potential losses, and 4) my options will be influenced by those institutions with money to spend that enables them to buy access to legislators.