The investment into Sub-prime and Alt- A mortgages has resulted in such great losses that the brokers are pulling back from their fiduciary responsibilities to their customers in other areas.
In particular I am discussing the class of securities known as auction rate preferred securities(APS). These securities are marketed by the major brokerage firms as AAA rated and perfectly safe.
Three weeks ago the Auction Rate Preferreds failed at auction. The failures have continued to this date. This happens when the brokerages pull back from making a market in these securities. The holders of these securities are unable to sell them. Many of these investors are retired individuals who were told these investments provide both safety and liquidity.
Auction Rate Preferreds get their name from the dutch auction that is held weekly to reset the rate of interest the APS pay to their holders. A few of the (APS) that have failed to clear at auction over the last three weeks are Blackrock, Pimco and Calamos. On the municipal side the N.Y. and N.J. Port Authority certificates failed.
For the past 25 years the brokerage houses have marketed these securities to their customers as cash alternatives. They have provided the market for these securities, both as buyers and sellers, under an implied guarantee of liquidity.
The investors that purchased these securities did so on the assurance of their brokers that these were safe and liquid investments.
The APS market has an $80 Billion market capitalization compared with the overall Money Market capitalization above $2 Trillion and the Credit Default Swap market size above $45 Trillion (twice that of the entire U. S. stock market value).
The resulting lack of confidence in the major brokerages by both their customers and issuers needs to be addressed. The U.S. financial system cannot function with it's institutions in breach of their fiduciary responsibilities.