Saturday, April 19, 2008

Auction-rate securities (ARS) - How could so many people have been so stupid?

It shouldn't have taken more than 30 seconds of due diligence for any "investor" to realize that auction-rate securities (ARS) were not "as good as cash", but somehow thousands of investors and quite a number of big-name businesses fell prey to the seductive allure of promises of higher yields. How could so many people have been so incredibly gullible and stupid?

Well, simply because they did not have a lot of choice.

It appears to me that the primary "reason" so many people got sucked into the ARS black hole of investing was that the yields offered by their brokers on "core cash" were incredibly anemic and below the yield offered by a number of the big-name money market funds such as Fidelity. And these anemic yields were offered even for cash balances over $100,000 and even over $1,000,000. These anemic cash yields seemed to have had two purposes: 1) provide the firm with very cheap capital, and 2) an incentive to con people into "investing" what was supposed to be "cash."

People were not out researching places to park their cash. They just assumed that their brokers knew how to park cash. I mean, like, that should be a no-brainer, right? Well, they were wrong in such an assumption. But the problem is that people don't like to spend much time thinking about simple things that should not require a lot of thought.

My real take on all of this is that if your so-called full-service broker does not offer you a decent yield for parked cash, then find another broker. I have been quite happy with Fidelity. And the default "core cash" at Muriel Siebert is quite decent as well.

And my real bottom line is that there is absolutely no longer any good excuse for even an average "investor" to depend any longer on a so-called full-service broker. My choice would be Fidelity or Siebert. In fact, I do business with both.

-- Jack Krupansky


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