NEW
YORK (Dow Jones)--Paul Zuccarini walked into his
local Bank of America Corp. (BAC) branch in Sewall’s
Point, Fla., looking for a certificate of deposit to
buy for a retirement account.
He
walked out with nearly half of his nest egg in
auction-rate securities, and assurances that he’d
have quick access to his funds should he need them.
Now, because the auctions that set the interest
rates on his securities have failed, Zuccarini, a
66-year-old retiree, can’t touch that money.
Since 1999, when Congress repealed the Glass-Steagall
Act - which separated banking and brokerage
operations - more firms have been trying to squeeze
the most from the relationships between their
business lines. Many banks now station stockbrokers
in their branches, hoping to catch some crossover
customers. They’re also allowing brokers to call
bank clients directly to offer them brokerage
products. But regulators and investors’ advocates
have raised concerns about the setup being confusing
to customers, who may not realize that brokerage
products are different from - and not as protected
as - bank products.
With reports of investors buying auction-rate
securities in bank branches, and now being stuck
without immediate access to their money, concerns
about bank branches that house brokers could
escalate.
"This situation is the perfect example of what the
problem is with having that mix," said
Stuart Meissner, an investors’ attorney in New York who
said he’s heard from around 10 people who bought
auction-rate securities either after they were
steered to brokerage desks in bank branches or
received cold calls from brokers affiliated with
their banks.
"Those
people are shocked as to what happened," he said.
A
Bank of America spokesman said the company follows
regulations governing the sale of non-deposit
investment products in banks. He said the firm is
committed to "best serving our clients."
Auction-rate securities are bonds issued by cities,
student-loan agencies and closed-end funds that have
interest rates reset by auction every seven to 35
days. About $330 billion of auction-rate securities
are now held by both institutional and individual
investors.
In
February, the auctions that reset the rates failed,
leaving hundreds - or more - investors with assets
tied up in securities they can’t sell.
Scott
Silver, an investors’ lawyer in Coral Springs, Fla.,
said he has a 70-year-old client who went to a
Wachovia Corp. (WB) bank branch last summer branch
to open a savings account or buy a CD. Instead,
Silver said, a broker with Wachovia Securities who
was based in the branch sold her $175,000 in
auction-rate securities - all of her savings. Silver
said the broker pitched them as equivalent to a
money-market account. Now the woman can’t access
money she needs to pay her taxes, he said.
"To
her, (if) she’s sitting in the bank, she’s dealing
with the bank," Silver said. "People don’t
appreciate the difference between the bank side and
the brokerage side."
Wachovia Securities spokeswoman Teresa Dougherty
said the firm is "working diligently on solutions to
this industrywide problem, seeking to return
liquidity to our clients as quickly as possible."
She said the firm is offering margin loans to allow
clients to regain some liquidity.
When Zuccarini entered the Bank of America branch
around August 2007, he said, he had already cashed
out of his retirement plans at another firm because
he was skittish about having his money tied up in
stocks. His goal, he said, was to buy CDs that he
could put into an individual retirement account.
When Zuccarini explained to the bank manager that he
needed to open an IRA to house the CDs, she directed
him to a financial advisor, who quickly drove over
from a nearby branch, he recalled.
Zuccarini said the financial advisor told him that a
CD wouldn’t give him quick access to his money, and
that she could get him better liquidity and a
slightly higher interest rate with another product.
In
addition to following the appropriate regulations,
Bank of America spokesman Matthew Card said, the
company evaluates "the investment needs of our
clients on an individual basis, guided by their
financial goals and risk tolerance."
Zuccarini said the financial advisor made it clear
that the product he was buying wouldn’t be
FDIC-insured. But he said she also told him he would
have good access to the funds and he would not lose
his principal. He said she told him there were no
risks involved.
"If
she had said anything at all about how it was
possible you could lose your principal, I wouldn’t
have done it," Zuccarini said.
Zuccarini said his account statements indicate his
principal is still there - unlike UBS AG (UBS), Bank
of America has not written down the value of the
auction-rate securities in customer accounts.
Bank of America’s Card said the company is, along
with the rest of the industry, "evaluating statement
pricing in relation to these securities."
But
even if his principal remains intact, the practical
effect is that Zuccarini can’t get to his money,
which, the last time he checked, was earning less
than 5% interest.
Zuccarini doesn’t have an immediate need for the
cash, he said. But he had only wanted to keep the
money out of the stock market for a short time. He’d
planned to reinvest once the market stabilized.
"It’s not like I’m going to starve to death if I
don’t get the money," said Zuccarini, who is
currently living off his Social Security checks. But
the bank "isn’t living up to their end of the deal,
and God knows what’s going to happen to the money."
