Georgia Briefing:

Is SunTrust next? ... Handel on the hot seat ... Auction rate security scandal has broad reach

InsiderAdvantage Staff Reports

(8/18/08) With threatening lawsuits already at the door, questions are on the rise as to what the investment banking arm of SunTrust, whose banking headquarters is in Atlanta, will do with regard to controversial “auction rate securities” sold to their customers.

The securities, which an increasing number of larger investment firms in settlements with New York’s Attorney General have basically admitted, were often sold to clients of those firms as being a safe place to “park money” given that everything from municipal bonds to student loan portfolios were being refinanced at these “auctions” in a matter of weeks, making investments in the higher return “safe havens” a liquid event. That is until the auctions stated to fail early this year.

Most of the major investment banks in New York have announced that they will step in and make good on the full value of the amounts clients invested in these securities. As one large holder of such instruments puts it, “They had no choice … They told us they were better than money markets and just as safe …in fact, safer because they said a bank money market was only insured up to one hundred thousand dollars.”

SunTrust is not alone in having failed to address the issue. Bank of America has yet to make clear its position. But Charlotte-based Wachovia crumbled after the New York AG put it under the microscope and announced Friday it, too, would make investors whole.

The massive auction rate securities failure in general has caused hundreds of thousands of individual investors and institutions to fret over access to necessary funds, which have been unavailable for months. One observer expects all of the institutions to “face the music” in short order. “None of these investment bankers or brokerage houses can afford being the black sheep. Once the big boys owned up in New York, the writing was on the wall.”

If SunTrust’s Investment arm has communicated a position similar to Wachovia’s to its clients, a search of news stories did not reveal such as of this past weekend. If not, expect Secretary of State Karen Handel to face either her first opportunity or failure of major consequence. Handel’s office regulates the sale of securities in Georgia. And expect the Georgia legislature to consider putting stronger teeth into existing laws related to such activities. “The big banks all left us” a longtime legislator observed. “What reason do we have not to adopt a New York set of laws to allow greater protection for Georgians in the future?”