In the name of creating jobs, large investors stuck with billions in a certain type of illiquid security known as student loan auction rate securities are lobbying the federal government to cash them out. This could be a $25 billion bailout for wayward banks who sold them worthless goods.
Nine U.S. senators, two Democrats and seven Republicans, including Mark Warner, D-Va., and Orrin Hatch, R-Utah, wrote a letter to Treasury Secretary Timothy Geithner in October asking him to “examine the need to intervene in the market.”
They wrote that the result of banks reneging “on their promises as to the nature of these investment vehicles,” was “dramatically reduced investments that have deepened our economic crisis and continuing high unemployment.”
Government action to liquidate these investments would likely increase employment and investment. A paper sponsored by the investors lobbying the government by University of Delaware economics professors James Butkiewicz and William Latham, says that freeing up the $25 billion stuck in SLARS by non-bank holders would boost the economy by up to $63 billion and help to generate as many as 441,000 jobs — almost the number of jobs lost in August and September in the United States.
The securities are long-term debt instruments that were bought by investors seeking a short-term, safe way to park cash — at least until the auctions for them froze in February 2008. At the end of 2007 the market for all auction rate securities, including SLARS, was as high as $330 billion. The total amount of ARS that remains illiquid is about $75 billion according to Mark Murphy at SecondMarket Inc., a company selling ARS at below par value.
It’s understandable that investor companies want their money back by whatever means possible, even if they could have chosen to park their money in lower-interest bearing Treasury bills. But taxpayers should not make them whole: Banks who misled investors should pick up the tab.
The government has forced banks that issued auction rate securities to repurchase them from small investors. According to an Oct. 21 Bloomberg News story, “26 banks involved in the sale of auction-rate bonds have negotiated settlements with state and federal regulators, paying $575 million in penalties and agreeing to buy back more than $61 billion of securities.”
Those agreements were based on evidence the banks marketed ARS as cash equivalent investments even when the market for them was failing.
According to agreements reached with New York Attorney General Andrew Cuomo, certain banks were supposed to make a good faith effort this year to provide liquidity to those large investors and update Cuomo on their progress.
Sinclair Oil Corp. asked the state of Wyoming to purchase at least $50 million in SLARS from them based on debt issued by the Wyoming Student Loan Corporation purchased through Royal Bank of Canada. State Treasurer Joseph B. Meyer rejected the offer as it would not benefit Wyoming taxpayers to hold long-term debt, he said.
Mike Beyer, chief executive officer of Foresight Reserves, one of the coalition members lobbying the government, said his mining company bought about $150 million ARS from Citigroup Inc. in January of 2008, right before the market for them crashed in February and auctions were already failing. Citigroup received $45 billion in TARP funds.
A Citigroup spokesman, declined to comment on the Foresight deal.
Beyer says his firm has had to slow plans to develop new coal mines in Illinois as a result of the ARS purchase. Those jobs pay $85,000 per year and the firm plans to hire another 500 people, he said: “They [the government] gave Citigroup a bunch of money, why don’t they make them give it to us?”
Other companies behind the lobbying effort include Abercrombie & Fitch Co., Duke Energy Corp., and Family Dollar Stores Inc.
Geithner’s office did not respond to a request for comment.
What’s clear is that the government has a duty to enforce the law equally under the 14th Amendment. Those protected include rich professional investors who don’t elicit much sympathy and who create jobs much more cheaply than the government.
Examiner Columnist Marta Mossburg is a senior fellow with the Maryland Public Policy Institute and lives in Baltimore. Email her at [email protected].
