When the collapsed Auction Rate Securities (ARS) market gets personal

The same thing is happening to me. I just sold my small business and I needed to park it somewhere I told my broker at smith barney that I want in temporarily in a safe zero risk investment, just like a bank money market. He did not give me any information nor did he say anything other than he is putting it in a place which is very safe with a slightly higher interest rate. Just I will need 7 days to get it out. That was the last i heard. it was about a month ago, it turns out that I need some of the money now, needless to say I cannot get it out. Does anybody have any suggestions as to what todo or how long this may take and what the end result will be.

I have a substantial amount of cash in Morgan Stanley and at my broker's suggestion put a lot of it in various Muni ARS. When things started looking dicey I called and was assured that none of my holdings were insured my AMBAC or MBI or in student loan instruments so not to worry. Two days later things froze up. I was told that the senior partners were meeting to figure out what to advise or do. My broker tried to be helpful. I was offered a loan against my holdings if needed. Happily I did not need the cash and actually got higher rates as many of the instruments reset to penalty rates. I then was asked if I would be willing to buy some of the instruments from other of their clients who needed the cash. Things have evened out now but from this episode one should definitely take away a sense of how tenuous our security in general really is and just how much of it is based on simply confidence in the system.

The story is universal that we were all told that these investements were "cash and money market" like and totally liquid on a 7 or 28 days basis. The Nuveen brochure which I just saw for the first time says "weekly liquidity." I am planning to hire an attorney to file lawsuit(s) within a couple of days as this was blatant misrepresentation, gross negligence and in my opinion fraudulent
behavior. Yes, I will pursue the indivdual investment advisor as well. They earn their commissions from being licensed experts and they made unsolicited recommendations without making full disclosure.

If you own Nuveen I would suggest that you contact Mr. John Canning who is the Chairman of the company that owns Nuveen, that is Madison DearbornPartners at:

Madison Dearborn Partners, LLC
Three First National Plaza
Suite 3800
Chicago, Illinois 60602
USA

Telephone: 312-895-1000
Fax: 312-895-1001

You should also ask everyone you know to put pressure on the investment houses and banks that created these products to step up to the plate and resolve the issue. In the case of closed end funds in may well be that they have to de-leverage and sell bond or security holdings. The press must get on top of this $400 billion dollar seizure of money that seems to be used by those banks and investment housed to pay off bad mortgage and credit debt. It's all fraud and it would take a fool not to believe that the Federal Reserve and Treasury Department doesn't know what's happening. If you want a conspiracy theory just add in the ratings houses and the bond insurers to the mix and use your intelligence.

I was called at home Saturday, Feb 15th by my UBS broker who broke the news to me that the auctions had failed. What Failed? was my question and why are you working on Saturday was my next one. I had been told these were 1 week CD or Money Market loans at higher percentage and they were CASH transactions by my broker and by my CPA who confirmed he had been told the same thing. He has many clients that he refered to USB and this broker and we all have substantial sums in what we all thought were safe and liquid 1 week terms.

I received a letter also dated February from UBS that states, "UBS worked to maintain liquidity during this unprecedented time of instability by purchasing securities in the Auction markets. However, as part of our regular and ongoing evaluation of markets and our allocation of capital, we have determined that we should not continue to add to our positions at this time. UBS is actively pursuing opportunities to assist securities issuers in finding other solutions, which may include redeeming the existing Auction Rate Securities and refinancing the debt through alternative financing vehicles."

I don't understand a bit of what that says. I was also told that all the major banks and other financial houses also quit trading. Reading other information on the web I find that 80% failed on the 13th, and ONLY 62% failed (395 out of 641) on Feb 20th. What happened yesterday, Feb 27th?

The article further states a secondary market was created on Feb 25th called Restricted Securities Trading Network for the securities. It doesn't say anything else about it; but, this is only two days later. I sure hope they get their act together in short order.

As someone else stated above, I too was given the opportunity to borrow money, up to 50%. I wasn't told if it was against the frozen funds or against my other investments.

One man's crisis is another man's windfall. I'll just wait and see and HOPE!

Ditto--I'm meeting with one of the most respected class action attorneys in the country tomorrow. Our Smith Barney broker, very much trusted, opened a money market account for me in '06--I asked for most liquidity and least risk. Fine, he said, cash would always be available on a few days' notice. No disclosures, no prospectus, no mention of any risk. Phone call 2/14/08, he sounds like he's on major tranquilizers: "auctions failed." What auctions? What securities? I had a money market account!
Add to this the fact that Smith Barney, Merrill, UBS s& the rest were propping the auctions up, keeping investors' liquidity going without disclosing that either...until 2 weeks ago when all at once they all decided "not to commit their capital"--ie to leave its investors holding illiquid, possibly worthless paper.
There some shark attorneys swimming out there, notably in Florida, who are soliciting these cases on contingency, but there is so much widespread loss here, and the fraud is so flagrant, it should & will be a class action in my view at least cost to the many injured investors. I'm filing one.

If you are planning a class action lawsuit please contact me at stkmrkts@aol.com. Please make the heading CLASS ACTION LAWSUIT.

I'm not sure if class action is the way to go as it appears that individual investment advisors at the brokerages have liabilty in addition to the brokerage (investment) houses.

It's too bad as some of them are nice people but they are also suppose to be experts after all they licensed professionals. If they are lazy and didn't do their homework and passed on faulty information that's negligence on their part and it doesn't get them a pass on their liability.

Again please e-mail me at stkmrkts@aol.com; lets hope the Treasury and the Federal Reserve step in and resolve this issue. Heck, if the experts at Nuveen that do know the bond market can't figure a solution out in 3 weeks that is very troubling.

Our company has substanial investementss in the Prefereed Auction Rate Accounts, our investement broker firm is UBS, Merced, Ca office, received telpehone call on approixmately 2/21/08 that our prefered Auction Rate accounts were frozen, we cannnot withdraw funds. However, our funds would continue to draw interest. We have always been informed by our broker that these funds were totally liquid & could be received with an advance 7 day or 28 day notice. We are still in shock. If this matter is not resolved very soon, interested in joining a class action suit. our company is based in Santa Cruz, Ca.

OK, my story is similar to the others. The scary part is that my broker admitted to me in a recorded voicemail that he had no clue auctions could even fail. He actually told me he "would be mad too" and that he did not understand the risks. I am not one to blame others for decisions I make; however, my broker admitted he was an idiot in a recorded voicemail so I guess I will join the masses and at least threaten a lawsuit. The irony here is that my broker begged me repeatedly to purchase stocks and mutual funds for which I always replied "too risky...I am not interested. I guess I was stupid because at least you can sell stocks!!!

I too have been caught up in this meltdown and would like to participate in a class action suit.

Here are some basic questions that none of the scores of news articles and blogs I have read have addressed. Perhaps someone can fill in some gaps here.

How long can these companies freeze our assets? A few weeks, months, years, forever? What's the basis for the determination? I was told that my preferred, AAA, closed end ARS were secured by required assets on a 2:1 ratio. What makes this kick in? When? My broker cannot answer theses questions.

Hopefully, someone can enlighten us. Also, please post the name of any firm you know is taking on a class action case.

RB

I don't have my broker on tape, wish I did, but he has repeatedly told me since this hit the fan: "This was never supposed to happen. This is a $340 billion market, & no one ever had a Plan B. There was never a Plan B" (he must have repeated this 20-30 times over). AND he admitted directly that he'd never sent me a prospectus, claiming "that's because it was a secondary market." Hunh? Now, only as of yesterday, I have my hands on the BlackRock prospectus which my broker had all along, and which Smith Barney, Prudential, Merrill, and Wachovia had all along. But it was never sent to me, and whaddya know, it says in bold-face print on page 1: "Investing in the Preferred Shares involves certain risks. See 'Risks' beginning on page 20." They knew, we didn't. No Plan B. Case closed.
Yes, a lot of these brokers are nice guys, & think management at the big banks were pushing this as policy because they made a little more off these auction things, being "sponsors" & "players" as they were. So the memo came in to the brokers: structure your money markets this way.
Anyone who is interested in collaborating on class action or parallel lawsuits, email me at lisaswanson@earthlink.net. The banks need to be pressured to pressure the feds in turn. And at the very least, we should be demanding equitable relief in the form of zero interest loans, until the banks find a way to get the money out that they put in.
Robert, I will be emailing you directly.

Anyone interested in collaborating on class action or individual parallel lawsuits please email me at lisaswanson@earthlink.net. Robert, I will be emailing you directly.
My broker admitted to me that he never sent me a prospectus, claiming that's because this was "a secondary market." Hunh?? But as of yesterday I now have my hands on the BlackRock prospectus which Smith Barney, Prudential, Merrill & Wachovia had since 2002, and never passed on to us, its investors. And whaddya know? In boldface type on page 1, it says: "Investing in the Preferred Shares involves certain risks. See "Risks" beginning on page 20." They had this, we didn't. They knew, they didn't tell us. End of case.
RB: I had the same confusion because my broker kept muttering wildly, "Triple A rated, collateralized 2:1." So I said OK, give me my collateral. Turns out the collateral has nothing to do with us as investors and cannot be reached by us--ever, at all. It was just supposed to support the notion that these things were "safe"--but now that the whole auction market has collapsed, what we were given cannot be sold or liquidated, and the security/collateralization of the borrower on the underlying loan is really of very little use to us.
Which leads me to the next issue--you ask, how long can they freeze these? Well, indefinitely, actually. Forever. Theoretically, you are accruing interest, but how comforting is that if you can never touch it? At very best, it's my understanding these things convert into "bonds" that don't mature for 30 years, interest at about 2.5%. So you won't have your cash & accrued interest for 30 years. Don't know about you but I might be dead by then!
So the banks must be pressured, so that they will in turn pressure the feds. There is a lot of cash frozen here--not good for an economy in recession, eh? The lawsuits must ask for some fair equitable relief, like: the banks make us interest free loans for the full amount of our frozen principal, & we repay them when the banks have gotten us out of the mess they got us into. Or they return our money, period, because it was procured by common law fraud. Trouble is, most lawyers don't want to take any cases that don't earn money damages out of which they can take their fee. But I'm going to find a way.
Again, everybody email me at lisaswanson@earthlink.net.

One other question: I understand that the "Restricted Securities Trading Network (RSTN) will start buying ARS on Monday on the "secondary market". I suppose this means they will buy at a discounted price. Anybody have info on this?

RB

Although I feel funny posting (I am a partner at a large New York based law firm), I stumbled onto this site and now feel compelled to respond. In response to requests made by several clients (both institutional and individual investor clients), my group has been examining the issues concerning the ARS market over the past month.

Please feel free to contact me if you would like to discuss.

Bruce Bernstein (bbernstein@dreierllp.com)

People, I understand your pain, but you need to chill.
Check with your broker how much the ARS are paying in interest, if they are paying anything at all, and I am sure they are, that means the underlying issuer (the bond originator) is paying interest. The ARS's are worth the dollars you paid. Just because the action failed to reset the rates every 7 days, and there are more sellers than buyers - does not mean you will not get your money back. In many cases the bonds are AAA / AA insured, which means they are safer then stocks. Give it few days for markets to settle, and you will be able to sell portion or all your holdings in ARS. Again, this is a problem with ability to sell your ARS at any point in time, this does not mean you can never sell them, and it does not that they are worthless. People are just buying Treasures vs. Munis, that is all.

-Jack

Jack, you sound like my broker! And as I told my broker, if these ARSs are so great, so triple A rated & way over-collateralized, so much safer than stocks, and if there is so very little to worry about... then let Citi Smith Barney buy them back from me. Great, they can have them. Let them buy them back now, at par, and give me my cash. Cash is what they said I had. They can keep the "security."
In other words, if they're so great, let the banks hold them. And let the banks wait till they can liquidate them at full value.
After all, the banks knew there was risk to their liquidity. But we didn't. And the banks bought 'em with our $$ without our consent anyway.

I am actually not a broker; I do have a large sum of money in ARS. You have a right to be upset, however you should consider that this is not an issues with securities being bad, rather there is a technical issue with liquidity e.g. ability to sell them. Its a market condition, that will correct itself as soon as buyers come in - which they will, noone has ever made 7 to 10% on AAA muni tax free bonds, the buyers will come, and the rate will drop to normal. I doubt that you are 'trading' your ARS every week, you are likely holding them in your account as long term investment. I do agree, that a brokerage company should take over your holdings at any time, if they do not just tell them you are closing your account.

Lisa: I agree 100% with your perspective. My instructions to my broker..."no risk, I need to sleep at night". I never dreamed I was risking access to my principal investment for a meager 1%-3% over market rate savings. My broker didn't even understand that auctions can be allowed to fail. The more I learn about the auctioning process I am PO'd with broker/dealers for knowingly allowing the system to malfunction. I would bet over half the investors in closed end auction securities were absolutely clueless regarding liquidity issues.

Here is the icing on the cake...I always kept large balances in my market rate checking account until BOA and BOA Investment Services starting hounding me to "put that money to work". I am sure my large balances flagged my account for possible investment. When you are tag teamed by both BOA and BOA Investment Services and told repeatedly that I could have my funds in 2 business days you beleive them. No mention ever of liquidity issues whatsoever. So yes it is a big deal if you thought you were being as conservative and your investments become indefinately unavailable.

Follow up to Jack, and for everyone else's info: it doesn't look like the market is going to come back any time soon for the "money market eligible" ARSs (the conservative ones!) because their max reset interest rate is fixed low. The ones that are selling now (auctions succeeding, & being sold in secondary markets) were the aggressive, "risky" ones people knew they were buying, which reset at very attractive high rates like 6, 8, 10 + %.
Look at the bond blog Accrued Interest--I'll let him speak for himself:

“Has all the good news on bond insurers improved the auction rate municipal bond market? Taking another look at the results of J.P. Morgan's auctions reveals that the ARS market is indeed thawing a bit. Morgan held 103 bond auctions on Tuesday, 47 of which failed. Looking a little deeper, however, and we see that all the failed auctions occurred where the bond had a relatively low "max rate." Remember that when an auction fails, there is some pre-determined rate at which the bond resets. The failure had nothing to do with the credit, but for the fact that the "max rate" was only 4.688%. Holders of these bonds ('LS's note: that's us folks') not only have zero liquidity, but an unexciting reset rate to boot. Among the successful auctions, rates ranged from 4.00% to 10.24%, with a median rate of 6.755%. While these rate resets will not grab headlines like the 20%-type rates seen over the last couple weeks, 6.75% is still about 450bps higher than where money-market eligible munis are trading.

So while we might say the ARS market is starting to function on a certain level, there should be little doubt about its future. Municipal issuers are highly likely to refinance these securities over the next 3-6 months, either into traditional put-bond structures or long-term fixed-rate bonds. There may not be such a thing as an auction rate municipal market this time next year.

In other words, it reads like there is capital available for non-liquid municipals as long as the rate is right."
http://accruedint.blogspot.com/2008/02/auction-rate-securities-hibernation.html

My only hope is that the muni bond holders even of our lower penalty rate bonds will refi & we go liquid. But the lower their rate, the lower their incentive to refi too--you see the dilemma.

Everyone should learn or have some second/third opinions onthe actual current value of each auction rate holding. 1st thing is that if your coupon is 6 or less the value IS NOT par. However the secondary market will be comming soon and the first in is scared unsophisticated investors and SHARKS. Nowing the real value of your securities will be crucial over the next comming weeks. The only reason brocerage firms are still showing par is because thier is no current secondary market and they cannot just make up prices. You can be sure that legal departments do not want par pricing but have no choice. You cannot just keep saying "oh yeah the price is par.....but you can't sell"


good luck

So Mike, you mean this secondary market is in essence a creation of the banks which finally enables them to discount the value of our positions--not for us to sell at par. And we will be offered some lower than par price, and they will tell us it's "now or never"?