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

There seem to be many misconceptions here.

I will address one of them.

In the case of Closed End Preferreds, your money is not gone.

It is being held by the Fund in the form of securities which CAN BE SOLD. They have AT LEAST $3 in stock for every $1 in your Preferred. That's the 200% coverage thats mandated by law.

So if they Sell that $1 out of every $3 they own, which would DELEVERAGE the fund, you get your hard earned money back, they stop paying interest on it, and everyone is happy.

This is what needs to happen. That is where the money is. the Closed End Funds HAVE YOUR MONEY, and the only reason for them to hold it at this point is greed on their part.

Now, this cannot happen overnight. It may have to play out over a long period. BUT, the mere fact that the fund that HAS YOUR MONEY is willing to do this will place a floor on the value of your preferred. So you can either wait for the redemption by the fund, or sell at a SMALL LOSS in the secondary market, if you need the money NOW.

If they refuse to do this, then you are stuck with a 500 years bond that will be salable only at a steep discount.

Those of us who were scammed by this scheme of the funds and brokers to borrow money on the cheap deserve at least this.

They have no right to market a liquid low paying investment , and overnight turn it into a perpetual long term bond.

Remember, the Closed End Funds HAVE YOUR MONEY. Go where the money is.

I have to agree with Lisa that there is not a strong signal that these aution rate securities and preferred auctions will have a viable open market in the near future.

The suggestion by one poster that when the interest rates go above 7% for AAA tax free bonds a liquid market will be created may be true. However that means the price of the bonds will fall substantially and that somebody is going to take a big loss. Well, I for one am not going to be that someone who takes a loss at least not without a huge legal fight. Who will be the target of the legal actions:

1. The Issuers
2. The Investment Brokerages
3. The Investment Advisors

I am fairly confident from preliminary legal research that all are subject to lawsuit although the Investment Brokers have the arbitration agreement in almost every client agreement using the American Arbitration Association or others. I suspect that lawsuits whether they be class actions or civil cases brought by individuals will try to break that arbitration agreement on numerous legal theories?

The other parties seem to be subject to the court jurisidiction according to preliminary legal opinions I've received. You should check with your own legal counsel.

I believe suing the investment advisors has significant merit; these people are licensed professionals earning salary, commissions and fees from selling their expertise to investors. For the most part they seemed to have failed but I do know of investment advisors who got clients out of auction rate securities because they saw the problems. That is all the more damning of those paid professionals who failed to get their clients out of these instruments or at the minimum advise them of the risks. I can say with certainty not only was I not informed I was lied to about the liquidity and safety of these instruments. Heck, I was never even given a propsectus.

Jack--Are you saying what I think you're saying? Do you think if we close our accounts, they will give us par on our ARS (the amount now shown on our statements)?
Could it possibly be so easy? I'll happily try it.

There is a US House Financial Services Committee Hearing scheduled for March 12 to discuss Municipal Bonds and the current credit crisis (http://www.house.gov/apps/list/press/financialsvcs_dem/press021508.shtml). I spoke with a legislative aid today to inform him that the real crisis is not with municipal governments but with individual investors who have their money frozen in these auction rate securities. He is going to do more due diligence on ARSs to see if a portion of the hearing should also be focused on investors. If you are in the same situation as myself (and if you are reading this, you probably are), I urge you to call the House's Financial Services Committee and explain the necessity of our government to look into what’s going on in ARSs. Ph: (202) 225-4247.

FYI, I just liquidated half of my ARS holdings. My advisor told me that about 75% of all auctions actually go through. Lisa, contact your broker, tell them to put you in line for liquidation, and they should start selling your securities for you. Seriously, a billion(s) dollar market can not go away, like with everything media driven - things get blown out of proportion and people start freaking out. I actually had 7% paying ARS sold -- given that someone wanted to get that much in interest. As far as I know mutual fund managers are buying those securities as well as wealthy individuals who want to capitalize on the rate increase. A good indicator of people getting back into the muni market is ticker symbol 'MUB', it shows general condition of the muni market. It hit a low last week on friday, and now coming back up. Personally, I am selling my ARS because of sparsity of buyers and I do not want to take any chances of holding them longer than I want, I do not care what rate they are paying now. When you are out of your ARS, you should start thinking of what to do with your cash next.

-Jack

jack:

That information is great. My life savings are in my ARS, but they aee ARPS, a little different from what you were holding.

Do you have any advice for me?

I really appreciate. I feel as though I was forced into these things, and know I have no idea what to do.

Regards,

Steve

You should also know that issuers of the bonds are refinancing their debt, since it makes no since to pay 7%-10% for something that can be financed with 3%. The ARS gets 'called', and you get 100% of your principal back.

-Jack

arps are an absolute disaster I have studied them from every angle.....no way out unfortunately. no way the closed ends de lever as they will get sued by common holders no way they refi as they will get sued by commons. so the will just sit....perpetually as it says in the prospectus. They have NO obligation to do anything. The mars are going to be fine as long as they are not student loan or educational finance authority . they are even worse then arps.

Mike, if they don't delever the ARPS, the preferred shareholders will sue. I think the lawsuits on the common side will not materialize - if a common shareholder does not like delevering, they can sell their shares at any time. Not so for the preferred shareholders

If anyone is concerned I urge you to contact the House's Financial Services Committee (Ph: 202-225-4247) and explain your situation. There is a committee meeting scheduled for March 12 where this will get discussed. Congressman Barny Frank is the Chair.

Looks like fund companies are beginning to think about deleveraging their ARPSs:

"Calamos Asset releases comment on auction rate securities market The failure of the closed-end fund auction process has permeated the entire closed-end fund mkt as liquidity providers have stepped away. Initially, failed auctions were limited to lower rated securities, but as liquidity disappeared, closed-end funds began to be impacted. Should the auctions continue to fail, common shareholders may eventually be impacted through lower distribution rates"

I agree with how so many of you feel. I inheritted a little extra money from my mother who passed away suddenly. She was frugel and as a teacher managed to have a good sum when she left this world. I was very responsible, or so I thought, and put it into a money market investment. That's what I was told. Then on February 13th my Citigroup financial advisor called to say the auction failed. What auction? How stupid do I feel now. All it took was a few hours of reading and now I know all about the investment I hold. Why didn't he do this when he sold it to me? Personally I think Citibank made a bad busniess decision to market it as "good as cash". It even appears in the money market section of the monthly statements as "Money Market and Auction Instruments". My financial advisor never ever used the term "auction instrument". Not in writing and not on the phone.
Now, damage control. I know that the bottom feeders will come out and make money off the school teachers who need their retirement money now. I want to beat them at their game but am I tough enough to live with the doubt? Not sure.
I've talked to a few friends who are securities lawyers and they calm me down and remind me that I haven't lost it yet. I happen to be invested in PIMCO High Income Fund-backed by "junk bonds". I hold preferred auction rate securities. I have been told to be a little patient and see what the next few weeks look like.
Did I mention that I live in Moscow, Russia. Yes. I should have just invested in a fund here and earned 50% but stupid me went to and American icon for banking, Citibank. I feel emotionally let down. There has been a breakdown somewhere.
I just keep telling myself it is a market reaction and not a case of default on the long term corporate debt. Any class actions out there?

I have been subjected to this same scam. Does anyone know a good attorney? My life savings is now worth nothing and it is frozen. I was told no risk, like a CD, and could get it out in 28 days. Now there is nothing left. I need a good attorney and not one of those sharks. Help!

I have some funds in a Nuveen ARPS. My experience is the same as others. I was told my funds could be obtained on seven days notice. To my knowledge I never received any disclosure materials concerning risk and was certainly not told of the liquidity risk. Was also told this was marginable, but now the broker says no they aren't and have never been, and they don't know who told me that. I listened to a Nuveen conference call, and they said there is 2.5 to 1 collateral ratio. However, there is no obligation to liquidate the collateral unless it is downgraded below AAA. So, the only way you get your money is if the collateral deteriorates in quality, which in this environment could be any day. In effect, they can keep your money indefinitely, paying something slightly over market interest.

our firm(s) are investigating the auction rate securities issues and plan on filing in Calif. please contact us at the e-mail address above if you are interested or for information.

Howard, I don't see your contact info.

My situation is identical to all of the others. In case someone files a class action suit please let me know.

Same story as posted in the blog. Had my life savings in ARPS. I think we have been seriously hurt by brokers, closed end mutual fund issuers and the financial institutions that made the market for them.

I believe we face very serious issues ahead as the amount of money is so big that it is going to be a hard battle and a very difficult solution.

I sent the following letter to Congressman Barney Frank a few days ago. Let's see if they do something about our issue. Please e-mail me WaterDallas-1@yahoo.com if you have a similar situation or ideas on how we can come together to resolve our problem..


" Dear Congressman

I would like to suggest the inclusion in the agenda for March 12th hearing on ARP a very important topic; The freezing of $330 Billion of private Savings in ARP's issued by Close End mutual Funds.

This Freeze has the potential to undermine the trust and confidence in the U.S. Financial System as well as send our country further into recession as this $330 Billion were short term risk free investments held by individuals who would use that money to buy houses, start business, etc… Thousands of private investors like myself have the potential to loose our life savings because of the break down of the auctions for ARP's issued by said Close End Mutual Funds.

• ARP's are issued by Close end Mutual Funds like Eaton Vance, Calamos, Advent Claymore, Merrill Lynch, etc.. Have a collateral of at least 2 to 1 of AAA rated bonds and were sold by the financial community as rock solid and liquid investment alternatives to Money Markets. For the past 20 years Banks and other Financial institutions would sell this securities and make and support a market in order to offer and maintain liquidity.

• Since February 14th all Banks and other Financial Institutions have stopped creating a market for this instruments leaving thousands of small investors like myself without access to our money. This investments are sold as Preferred Shares issued into perpetuity with no forced redemption date by the Close End Mutual Funds.

• The Mutual Funds issued them with the intention of being liquid every 7 /28 days. They made arrangements with Banks and other major financial institutions to sell this securities and to make a market for this securities in order to sell them as alternative to money markets.

• Contrary to what is happening in the Municipal Bond Sector , the Problem lies in that the Close End Mutual Funds have a provision that when an Auction Fails the rate is set up at a Maximum of 1.25% times higher than the Money Market rate. Thus making the penalty rate very low. Because the penalty rate is very low it does not attract new buyers who would create liquidity. Making matters worse Mutual Funds do not have the obligation to redeem the preferred shares and give us the promised liquidity. Closed end mutual funds even recognize this fact. See press release at the end of this letter issued by Eaton Vance, Inc on February 14th.

I would like for the financial services committee to investigate on the repercussions of this and find a solutions as the sudden freeze of aprox. $330 billion dollars has severe consequences trough out our economy. This $330 billion were invested for short term, private individuals like myself. The effects of freezing $330 Billion dollars pushes our country even further into recession and loss of confidence in the financial institutions. "

I also sent the attached letter to Barney Frank (Chairman of the House Financial Services Committee) ahead of the March 12th hearing on the matter. I urge others to do the same. Website info on the Committee: financialservices.house.gov/

Dear Congressman Frank: I understand that the House Financial Services Committee will be holding a hearing on municipal bonds on March 12, 2008. I am writing to ask that this hearing include a focus on the financial meltdown in Auction Rate Securities (ARSs), a $330 billion market, and the subsequent impact on individuals like myself throughout Massachusetts and the United States.

The auction-rate preferred securities were sold to individuals, like me, as cash-equivalents that could easily be redeemed into cash at scheduled auction dates (7, 28, or 35 days). However, starting in February 2008, the ARS market started to experience auction failures, resulting in “frozen securities” for which investors are unable to liquidate. This has become a crisis of major proportions ($330 billion) impacting individuals and corporations alike. There are news reports that corporations who purchased these securities are struggling to make their payrolls and manage their working capital, and are unsure about their ability to make future capital investments. Companies like Bristol Myers Squibb, US Airways, 3M, American Eagle Outfitters, Cypress Semiconductor, and Ann Taylor are just a handful of companies that have recently announced their locked investments in ARSs.

Individual investors will also face significant liquidity issues in the very near future as a result of these auction failures. It is only a matter of time until you hear increased investor horror stories – the inability to pay their tax bills this April, to make their mortgage payments, or to make any large purchases. Personally, I had been relying on the use of these funds for the purchase of a house, which I am scheduled to close on in XXXXX, MA later this spring.

These securities are being deemed as “broken” by the investment community and it is doubtful that investor confidence will ever be restored. To make matters worse, the companies who marketed and sold these securities (e.g. Nuveen, Pimco, Eaton Vance) are unable to say when, if ever, investors will ever be able to get their money back.

I respectfully request that the House Financial Services Committee investigate the possible deceptive marketing of these Securities as well as the possible solutions to resolve this situation.

I have enclosed some additional background and some articles on the Auction Rate Securities situation. I am happy to speak with you or your staff further on this issue. I appreciate your attention to this very serious matter. Thank you.

I would encourage anyone writing their representatives about this to emphasize these points.

In the case of Closed End Funds. where much of the actual illiquidity is, these funds have to ability to refinance, or sell the LEVERAGED portion of their portfolio's, and return the borrowed money locked in these PARS. (Preferred Auction Rate Securities).

Many of those holding individual Muni issues have been able to sell at par, as the penalty reset rates are high enough to encourage new money. In addition, many municipalities and corporations are expected to refinance and retire the Auction Rate issues, contributing to current liquidity.

In the case of CEF's, they are not paying enough of a penalty rate to bring out opportunistic investors. So the CEF's are still benefitting from a scheme they encouraged, and unsuspecting , misinformed investors are left holding the large bag.

The only way these funds will be forced to do the right thing, is if interest rates skyrocket and they are losing money on the rate they have to pay on the ARPS . Are you willing to wait YEARS for that?

If they can't refinance through an embattled banking system, then a long term plan of deleveraging is called for. This will solve the current liquidity problem as well as create a long term solution for investors. NO ARPS buyer had intended to be holding a perpetual bond, or to take a large loss when the underlying credits were sound. It's an outrage.

This 20 year 'ponzi' scheme has come to an abrupt end. The marketing of ARPS needs to be carefully examined by the authorities. The big brokers made a killing on fees for 20 years, and then abandoned the market with no notice because they COULD.

PS Many folks that lived through bank failures in the 30's never trusted banks or brokers again.

Do they want to create another generation like that? This is a good start.

Jim, I called Nuveen today to get an update on the ARPSs. I also inquired about the idea of de-leveraging the funds. The person I spoke to said that, although they are considering this as an option, it will only be considered under a “worst case” scenario. I asked how bad it would have to get to be considered “worst case”. The customer service rep said that the ratings on the securities would have to be cut. I think these fund companies consider this as a final step, ultimately killing these vehicles and their profitable business. Too much conflict of interest here – very frustrating.

While I think their other solutions may increase liquidity, this may take awhile. The shortest path may be via the legislative pen. That is why I am encouraging everyone to contact Barney Frank’s office. You can contact your respective representative(s), but I think we need to concentrate our efforts on the one person who can make change. Barney Frank (Chairman of the Financial Services Committee) so happens to be my representative; I know him to be very intelligent and very caring of the innocent bystander. The House Financial Services Committee phone number is (202) 225-4247 – ask for his legislative aide Peter Robertson.