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It seems as though every week, the public is forced to learn another one of Wall Street's strange names for a surefire deal that couldn't miss. But the reason we're learning about those strange names is because -- contrary to promises -- the can't miss deals are shutting down -- taking Wall Street's credibility down along with them.
The latest of these is auction rate securities (ARSs) -- a $330 billion market for long-term bonds that are supposed to pay lower rates because their interest rates are set through auctions. The New York Times reports that municipalities who issued ARSs are suffering because 1,000 of these auctions failed and instead of paying 3% interest rates, they have to pay 20%. And if that wasn't bad enough, the investment banks that oversee these auctions are refusing to let investors withdraw their money.
Which investment banks are imposing this pain? Goldman Sachs Group (NYSE: GS), Merrill Lynch (NYSE: MER), and Lehman Brothers Holdings (NYSE: LEH) and the problem with ARSs is not limited to municipalities entities such as the Port Authority of New York and New Jersey. Closed-end mutual funds, student loan companies and corporations also issue them.
This means that despite the Fed's promises to lower rates, they'll keep rising. This will bring the economy to a screeching halt since capital won't be available to finance growth. And with investors' cash frozen, we'll see runs on the bank that will make the Great Depression look quaint. Meanwhile, those low interest rates will drive inflation up as oil prices -- which are denominated in dollars -- rise.
If you own closed end funds, it's probably prudent to find out whether those funds own ARSs. That's because if they do, those funds are going to decline in value. Corporations that invested in these securities will be taking big write-offs. And so will issuers of student loans.
Meanwhile, after subprime mortgages, Collateralized Debt Obligations (CDOs), Collateralized Loan Obligations (CLOs), Structured Investment Vehicles (SIVs) and ARSs we have not seen the last of Wall Street's alphabet soup of financial catastrophe.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter
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Reader Comments (Page 2 of 2)
5-06-2008 @ 12:40AM
Serge Birbrair said...
If you look for more information and regarding where to begin, check
Auction Rate Securities Action List:
http://www.nothingcontroversial.com/forum/showthread.php?t=5690
As far as getting evidences and information regarding your rights and arbitration against the company which sold you this junk -
join us at
http://www.nothingcontroversial.com/forum/forumdisplay.php?f=25
Auction Rate Securities Chat Board