Harry Eagar’s story in the Maui News about the county’s lawsuit against Merrill Lynch suggests a less rosy interpretation than that presented by state officials of the transactions that left the state stuck with over $1 billion locked up in Student Loan Auction Rate Securities (SLARS).
Remember back in December when the state’s budget director tried to be quite sanguine while describing to a joint legislative hearing about the state’s inability to access the $1 billion in SLARS it had purchased and now can’t sell without taking a big loss?
Maui has taken a very different approach by going to court seeking recovery and damages.
Maui was pitched these investments by Merrill Lynch, while the state dealt with Morgan Stanley Smith Barney. But you’ve got to suspect that the situation was essentially the same in both cases.
According to Eagar:
According to the county’s lawsuit, Merrill began soliciting the county to invest in SLARS notes as early as February 2007, often calling several times a day to push – for Maui County – this novel instrument. That summer, a structurally similar but unrelated auction rate market – backed by subprime residential mortgages – collapsed.
By that August, according to the complaint, Merrill knew or should have known the student loan-backed auction market was no longer “sustainable,” yet it kept selling, the county lawsuit says. Maui County bought its first SLARS, $2 million worth, in mid-August.
Unknown to the public, the SLARS auctions were on life support. At weekly auctions, Merrill was not getting offers for all the SLARS it needed to sell. To maintain the apparent value, the lawsuit says, it had to buy SLARS for its own account.
But its risk managers were wary of the company’s exposure and had limited the amount of SLARS Merrill could hold itself, the lawsuit says. So Merrill was looking for new customers to take these notes – which were not finding buyers at auction – off its hands.
It kept telling Maui that the investments were safe up to Feb. 12, 2008, the day before the SLARS market collapsed, according to a timeline provided by the county.[emphasis added]
I’ll bet Senator Donna Kim is watching this with great interest.
Click here to view a copy of the Maui County complaint.
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Our prison are full of african americans who are stuck there on mandatory terms because they were fooled into thinking that selling a rock on a corner could bring them an easy life
but don’t hold your breath expecting our government to fill the prisons with the Ivy League master minds that nearly sent our world into economic collapse