The front page story in today’s Wall Street Journal illustrates how investors of all types have been stung by the subprime crisis. The WSJ reports that the Maher brothers, M. Brian and Basil, have lost over $286 million in investments through Lehman Brothers Inc.
The Maher’s sold their family’s shipping business this past summer for over $1 billion. Following the sale, the brothers sought investments that were safe and conservative. However, within weeks they had lost over a quarter million dollars.
How can this happen? Well the Mahers are not unlike many investors who were allegedly misled regarding the investments they were sold.
At issue in the Maher case are “auction rate” securities. These auction rate securities are long term bonds that behave like short term bonds. Until recently, not much was known off of Wall Street about these products. However, as Wall Street became more and more creative with the investment products they packaged and sold, these auction rate securities started finding their way into more investors portfolios.
The lure of these bonds was that they acted like money markets while producing slightly higher returns. In addition, these funds were easy to buy and sell. This was exactly what many conservative investors wanted. Unfortunately, these bonds, like many others, did not perform as represented.
One outgrowth of the ongoing mortgage and subprime crisis is that many investors and banks are not willing to add more debt positions to their books. As a result, the market for these funds has dried up. This has left investors holding products that are now worth only a fraction of their original value.
While their losses are staggering, the Mahers are just one example of investors suffering losses due to Wall Street misrepresenting the complex products they have created. Their case is no more disturbing than the scores of investors who lost far less. No matter what the losses, Wall Street needs to be held accountable for their misrepresentations.