Auction-Rate Danger Flagged in '05

Silbert's company, Restricted Stock Partners, is taking advantage of the market dislocation and giving unhappy investors a place to unload their severely devalued auction-rate securities.

"The municipal [auction-rate securities] are basically trading at par, but the student loan [auction-rate securities] and the ones based on [collateralized debt obligations] are pennies on the dollar," said Silbert. "That's where most of the damage was done."

Meanwhile, Citi, UBS and Merrill have moved to make amends with retail investors. New York Attorney General Andrew Cuomo on Monday warned other banks, including Morgan Stanley, to follow suit. Institutional investors have less recourse.

But it seems regulators could have avoided at least some of this pain, had they reacted to Pricewaterhouse back in 2005.

"If they had done more, we wouldn't be in this mess," Pan says.