Lots of news this morning circulating about an imminent suit New York AG 
Cuomo is bringing against Schwab.
According to the WSJ:
In a statement, Mr. Cuomo said brokers at Charles Schwab & Co. repeatedly represented the securities as liquid, short-term investments without disclosing the risks, comparing them with money-market funds or certificates of deposit.
“Charles Schwab owed its customers a duty to properly understand and make accurate representations concerning auction rate securities,” Mr. Cuomo said in a statement. “Today we commenced a lawsuit to remedy Schwab’s repeated breach of that duty. This filing should send a signal that anyone in the industry who misrepresented the risks of investing in auction rate securities will be held accountable.”
Here’s a quick Bloomberg take, as well:
BusinessInsider reports that another WSJ story details that brokers under study said the following when marketing ARS to their clients:
In one exchange between a Schwab broker and client that was reviewed by the Journal, a customer says: “You know, I’m not trying to make a ton of money. I just want to play it safe.” The broker responds: “The hardest part of this auction is getting into it. That is the tough part. Getting out is easy as just selling.”
At first, I was sort of surprised given how much noise there is out there that the media would focus in on this story. But as I was thinking more about it, I realized there is a larger issue at stake.
Schwab’s spokesperson’s retort says it all:
The Attorney General’s demand that Schwab act as an insurer against an unprecedented market collapse that it did not cause and could not predict is legally unsound.
Wall Street ran away screaming from the ARS market after years of underwriting and investors were left holding the bag. Sure, I’m sure the brokers misrepresented ARS risk. But, heck, I bet they didn’t even understand them well themselves. They were the sorry-suckers at the tail-end of a period of financial productization that smacks of everything that went wrong during the last few years.
And now, with investors smarting from the pain, the gov is coming to the rescue and asking Schwab, like numerous other brokers have done already, to make everyone whole.
It’s sad that investors have to pay for the misdeeds of the industry but blaming the middlemen is misplaced.
Update 8/19:
Charles Schwab published an editorial on the Op-Ed pages of the WSJ claiming innocence. I especially liked the veiled threat of imposing an asset management fee on all Schwab accounts to pay for making everyone whole.
If Schwab is going to be held responsible for guaranteeing every decision an investor makes, we’d need to severely limit what they purchase. Would we tell them they couldn’t buy Google or IBM stock because regulators or politicians don’t think they are smart enough to assess the risks and could hold us accountable for any losses? The logical outcome would be that individual investors would be constrained to a small set of plain vanilla investments—Treasurys for all—or would be forced to pay us a fee to manage their account.
