Monday, February 06, 2012

NY Times: A Wipeout That Didn’t Have to Happen

Bobby L. Hayes, an engineering entrepreneur in Incline Village, Nev., used to trust financial institutions. This is the story of why he no longer does.

Mr. Hayes won a securities arbitration last week and was awarded $1.38 million from the panel that heard the case. Banc of America Securities, now Merrill Lynch, must pay the award, which represents all the money Mr. Hayes lost on a complex security, plus accrued interest, lawyers’ costs, and hearing fees.

The Hayes case highlights this question: Exactly how did Wall Street price the loans that it bundled into securities and sold to investors?

For anyone hoping to hold firms and individuals accountable for misconduct in the credit crisis, valuation practices are a rich vein to mine. Last week, for example, prosecutors in New York City wrung guilty pleas from two former mortgage traders at Credit Suisse who admitted inflating the values of mortgage bonds that the bank held on its books. As the subprime disaster spread in 2007 and 2008, one trader said he mismarked the bonds to please his superiors; another said the fraud was intended to keep him in line for a rich bonus. The bank itself was not charged.

The outcome of Mr. Hayes’s case seemed to confirm his argument that prices on some of the loans in the pool were artificially inflated at the time of purchase. We can’t know for sure, though, because the arbitrators did not say why they ruled as they did.

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