Auction rate securities scandal shows we’ve learned nothing from the sub-prime mess.

The recently breaking news story about leading financial institutions selling auction rate securities with misleading marketing shows that neither financial institutions, nor investors have changed their behaviour since the financial meltdown caused by excessive credit and the sub-prime implosion.

Several leading financial institutions have been fined and forced to repay investors their investments in auction rate securities.  The fiduciaries have been found to have told investors that investment held a similar rate of investment risk to cash, which of course they don’t.  Even if you don’t know what an auction rate security is, you know its not cash.

But its not only the fiduciaries that are shirking their responsibilities.  Its also the investors.  The minimum lot size is usually $25,000 and buyers are mainly institutional and high-net-worth investors.  In other words, investors that should know what they are doing.  They were obviously looking for a free ride, something for nothing, as they did when they bought in to CDOns and the sub-prime market.

This latest scandal shows that no-one has changed their behaviour and the market remains fundamentally flawed by a pernicious streak of moral hazard in the leading players who should be setting a high standard, rather than carpet bagging.

Latest settlements reported here.

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