Today's Wall Street Journal [subscription required] includes a scary article by James Stewart who thought the money he had in an Auction Rate Securities (ARS) account with Merrill Lynch & Co. (NYSE: MER) was just as safe as a money market fund. Then he was shocked to discover that since the market for ARSs had ceased to function, his "safe" money was frozen.
Stop to consider this for a moment. Imagine that you had a significant chunk of your savings in a bank or money market fund. You read news that there were problems with some of the investments in these funds. So you call the institution to get some money out and discover that you can't withdraw a penny. How would you feel?
Well I am amazed at how calm Stewart appears in this article. He mentioned that he doesn't really need the money in the ARS account and that he has no way of getting it out. Merrill Lynch, unlike some of the money market funds that had problems with subprime-mortgage backed securities, will not make good on those ARS accounts. There are too many and it doesn't have the money.
Stewart is waiting to hear whether Merrill will let him take out an interest-free loan using his now frozen account as collateral. Lawsuits anyone?