Today's Outrage: Schwab's ARS Victimhood

Charles Schwab (SCHW Quote) is claiming to be the victim in the collapse of the market for auction-rate securities, the now-maligned variable-rate debt instruments that were once considered as safe as cash.

Victimhood is basically Schwab's defense against charges by New York Attorney General Andrew Cuomo that the brokerage over hyped the ARS products to its clients and failed to warn them about the pending collapse of the market that would make the securities nearly impossible to unload.

Brokerages like Schwab like to point out that they are just the middlemen, connecting buyers to sellers. From Schwab's perspective, it neither created the ARS market nor contributed to its collapse.

Can any single company be blamed for the collapse of the ARS market, invented by Lehman Brothers, enhanced by Goldman Sachs (GS Quote) and eventually joined by Citigroup (C Quote), JPMorgan Chase(JPM Quote), Morgan Stanley (MS Quote) and others? Can you blame the sales person when the product is faulty? I guess it depends on the sales pitch, which is what this case is about.

Cuomo is claiming that Schwab brokers didn't understand what they were selling. I don't know exactly what Schwab clients were told or whether the phrase "safe as cash" was ever uttered by a Schwab broker. Even if they did say such things, they weren't alone. That was industry parlance back in the day.

Auction-rate securities are typically derived from corporate and municipal debt, so it's easy to understand why they were considered safe bets. They are also expensive to buy, often denominated at a minimum of $25,000 and sold to institutional investors and the wealthy.