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

I was told by my UBS broker in NJ that these shares were an ultra-liquid, ultra-safe cash alternative. All I needed to do to get my money was to give them notice, and within a maximum of seven days, the money would be accessible in full. At no point were these shares ever represented as a fixed-income instrument (debt), or worse, as preferred equity with no repayment term in the event of continual failed auction.

I agree with Jim that pressure needs to be applied to issuing funds (John Hancock, Nuveen, Blackrock, etc) who must de-lever their income funds and give APS holders back their money in the event they can't find alternative (cheaper) financing within a reasonable period of time (3-6 months). If it affects their overall NAV (and subsequent returns on common shareholders return on investment). This needs to be at the core of any lawsuit since primary goal of APS holders is LIQUIDITY.

Nuveen and the rest of them, of course they don't WANT to deleverage while rates are in their favor.

At the same time, they were complicit in the masquerade that these were liquid instruments. The CEF's knew full well that auctions were rigged, backstopped, and they were very happy to keep it a deep dark secret.

As shareholders, the board members of the CEF have a responsibility to ALL parties, ARPS, as well as common shares. Let them explain how they can refuse to provide you liquidity for the sake of additional PROFIT at your expense.

In a court of law, this deception will not play well. If it has to come to that , then let it be.


PS, I don't use the term PONZI lightly. It's in the nature of deceptions that they blow up overnight. In this case there is not money lost, but liquidity.

If the banks and CEF's can get away with this, then I'm afraid nothing is sacred (if it ever was).

Here are my further thoughts on this mess. Blackrock's website speaks of how these auctions may never clear, which would translate into--you have made an infinite loan at a smidge above market interest. One has to wonder whether this isn't some elaborate hoax. Think about it. All these financial outfits lock people into putting billions into what is a no maturity loan at a short term interest rate--a hedge fund's dream! Then there's all this handwringing about how they're working around the clock to rectify the mess. The same perpetrators of this massive fraud, which makes Enron look like a case of shoplifting, are perhaps at this moment setting up the vehicles to come in and graciously relieve us of this detritus at 50 cents on the dollar, after which, following a decent interval, all of a sudden the closed end funds deleverage, and they make 100% profit. I'm sure it's all been done before in a different context, although not on such a massive scale.

Everybody: the more I think about this from both a legal and factual perspective, the more I think we are all tending in the same direction. I think we need to sue the funds as a class. We are all INVOLUNTARY preferred shareholders in these funds and our interests are being betrayed. I don't want to be their shareholder and never asked to be, heaven knows, but at least it gives me standing to sue them. Whereas you know, if you sue your broker, you will end up in binding, nonappealable arbitration, with no right to attorneys fees or real damages or costs. Nor is it really feasible to bring a class action.
But the funds designed, rigged and manipulated this market from the beginning, and now they are holding our money on the pretense that they can't delever because it will injure common shareholders (prove it to me) and that they don't have to because it says in their prospectuses they needn't unless they are downgraded. (Don't buy the argument that they are only looking at delevering and liquidating us "if" they are downgraded--they are OBLIGATED to delever if they are downgraded.)
But none of us ever got their prospectuses, oddly--through ANY broker, and that is beginning to smell big time to me. Sorry, they can't ride on a disclaimer in a prospectus that their agent, the fund underwriter, never gave to me...probably because they told the brokerage this was a "cash equivalent' too.
Any crackerjack class action lawyers out there--hear me. I cannot do this alone, much as I would like to. We must bring this suit.
As to writing to Rep. Frank, I doubt he is very interested in the woes of those he perceives as "wealthy investors." No one will realize we are just ordinary people who lost our life savings until we make it clear. I'm writing, though I expect he is much more interested in the plight of the municipalities, which will soon be resolved when they refinance. Make it clear who you really are, and what you really lost.

Everybody: the more I think about this from both a legal and factual perspective, the more I think we are all tending in the same direction. I think we need to sue the funds as a class. We are all
INVOLUNTARY preferred shareholders in these funds and our interests are being betrayed. I didn't want to be their shareholder and never asked to be, heaven knows, but at least it gives me standing to sue them. Whereas you know, if you sue your broker, you will end up in binding, nonappealable arbitration, with no right to attorneys feesor real damages or costs. Nor is it really feasible to bring a class action at arbitration.
But the funds designed, rigged and manipulated this market from the beginning, and now they are holding our money on the pretense that
they can't delever because it will injure common shareholders (prove it to me) and that they don't have to because it says in their prospectuses they needn't unless they are downgraded. (Don't buy the argument that they are only looking at delevering and liquidating us "if" they are downgraded--they are OBLIGATED to delever if they aredowngraded.) But oddly, none of us ever got their prospectuses,--through ANY broker. Sorry, they can't have a free ride on a disclaimer in a prospectus that their agent, the fund
underwriter, never gave to me...probably because they told the brokerage this was a "cash equivalent' too.
Any crackerjack class action lawyers out there--hear me. I cannot do this alone, much as I would like to. We must bring this suit.
As to writing to Rep. Frank, I doubt he is very interested in the woes of those he perceives as "wealthy investors." No one will
realize we are just ordinary people who lost our life savings until we make it clear. I'm writing, though I expect he is much more interested in the plight of the municipalities, which will soon be
resolved when they refinance. Make it clear who you really are, and what you really lost.

Lisa, according to what I've been reading, everyone who has gotten stuck on these ARPSs got told the same story. Plus no prospectus. Anything else I invest in for the first time, other than a common stock, I get a prospectus. But not this, which is a Nuveen investment, a term I use charitably. I have not been able to find a prospectus anywhere on the CEF in which I find myself an involuntary investor, as you so well put it. I think you put it quite well that we cannot be bound by something we never even saw.

Lets up this plays out (from today's Wall Street Journal:

Auction-Rate Securities May Get Help
Money-Market Funds
Check Out Conversions
As 'Win-Win' Deals
By DIYA GULLAPALLI and SHEFALI ANAND
March 6, 2008; Page C2

Money-market funds are emerging as a potential white knight for some troubled auction-rate securities.

Auction-rate securities are debt investments that reset their interest rates as regularly as every seven to 35 days. In recent weeks, the $330 billion market for such securities has seized up, leaving many investors unable to cash out.

CONVERSION GAME

Now there is an effort under way to convert auction-rate securities into more-liquid investments that would be acceptable to municipal money-market funds. The effort would benefit the money-market funds, which have been struggling in recent weeks to find attractive securities amid problems with the bond insurers backing many of their normal holdings.

Overall, the conversions are "a win-win for tax-free money funds," says Deborah Cunningham, a money-fund manager at Federated Investors Inc.

Converting auction-rate securities into money-fund eligible investments is often done under the original bond documents. The biggest sticking point could be that the borrower of the auction-rate securities or another financial institution must agree to buy the securities in the event no other buyers emerge. That backstop is what essentially differentiates auction-rate securities from investments called variable-rate demand notes that can be held by municipal money-market funds. But with financial institutions suffering losses, few may want to step up and take on that risk.

In some of the first deals, the borrowers using the auction-rate securities are providing the backing, rather than an outside financial institution. Restructurings are happening on a "deal-by-deal" basis says Federated's Ms. Cunningham.

The Georgia Power unit of Southern Co., for instance, recently had $700 million in tax-exempt auction-rate securities, and is now in the process of converting about $500 million of that into variable-rate demand notes, says David Brooks, managing director of capital markets at Southern. As the auction-rate market "got really ugly," in recent weeks, "we started putting out conversion notes," he says. Georgia Power priced about $33 million of the converted securities yesterday, and was planning to price another $100 million today and tomorrow that would be money-fund eligible. Rather than use an outside bank guarantee, it issued the new securities with the backing of its own credit. The benefit of such a move is lower borrowing costs than have recently been available in the auction-rate market. The pricing yesterday, for instance, was approximately 2.70%, while the borrower had recently seen auction rates from 5% to 7%.

The Massachusetts Health and Educational Facilities Authority had $79 million revenue bonds remarketed yesterday on behalf of Partners HealthCare System in Boston, with more to come next week. The borrower is using Bear Stearns Cos. and J.P. Morgan Chase & Co. as remarketing agents as the new securities are pitched to outside investors, and has elected to support the bonds with self-liquidity rather than an external bank facility. "We'd definitely look at that" deal says Joe Lynagh, a tax-exempt money fund manager at T. Rowe Price Group Inc.

What is happening to us has serious consequences for us as well as for the US economy. If this is not fixed, the reputation and trust in the institutions and the mechanics of the worlds strongest financial system will be seriously hurt. Will anynone want to invest a penny in the US ?

We have financed our trade and fiscal deficit for years with the investments and savings from the world. They have invested here beacuse we were the ultimate bastion of safety and legality. No wonder the Dollar is at 1.50 + to the Euro. If this stupidity and abuse continue we may reach 5 or 10 ...

I think litigation is our last resort. Our Children will have children by the time we get ouor money back.

We are not billionaires asking to beeing rescued from our mistakes. We are ordinary middle class people who invested in low risk low reward securities. Saved our hard earned money in liquid and safe vehicles while we : Bought houses, started small business, pay our kids colleges, etc...


At this point I think we should hire a Lobbist or Profesional PR firm to make our case to Congress, The FED, the Treasury and the White House.
Ideas anybody on how we can organize to do this ?

email me at: waterdallas-1@yahoo.com

George

Another Letter to Congressman Frank


"March 6th, 2008


Chairman Barney Frank
United States House of Representatives
Washington, DC 20515

Via Fax: (202) 225 - 6952


RE: Adjustable Rate Preferred (ARP)

Dear Congressman Frank:

I'm an individual who invested my life savings in Auction Rate Preferred issued by close end mutual funds. I'm an ordinary middle class person who invested in low risk / low reward securities. I was saving my hard earned money in liquid and safe vehicles while I saved enough to buy a House. There are thousands of people like me that are not billionaire asking to being rescued from mistakes, but ordinary middle class people that saved their hard earned money in accounts that were sold as low risk low reward.

The Brokers that sold this to us tell us that our money is safe, it is just that that it is illiquid. As we read the fine print the illiquidity can be into perpetuity.

• The Close End Mutual Funds prospectus although written, is immoral and I'm sure illegal. Because what the prospectus does not say is that for 20 years their was an agreement in place that the Market Makers: Citigroup, UBS, Merrill Lynch, ETC… always bought and sold this securities to and from the public every 7 or 28 days.

• The close end end mutual funds hide in their prospectus. As long as they pay the interest they have no obligation to redeem the preferred shares. Not 1 year, not 10 years not 100 years, it is into perpetuity.

• Furthermore the close end funds say: The cost of paying the interest to the preferred is so low that it is to their advantage to maintain this leverage as it enhances what they pay to the commons shareholders. ( in other words, let's keep stealing from the preferred, because they can ! )

Congress needs to investigate this matter urgently as what is happening to us has serious consequences for us as well as for the US economy. If this is not fixed, the reputation and trust in the institutions and the mechanics of the worlds strongest financial system will be seriously hurt. As a country we have financed our trade and fiscal deficit for years with the investments and savings from the world. Will anyone want to invest a penny in the US ?.

Congressman I urge you to investigate into this matter as it is very very serious. This is starting to look like the beginning of a melt down of the financial and regulatory institutions, similar to what led to the great depression of the 1930's. "

I think the following link should be required reading for everyone, on the difference between ARS (auction rate securities) and CE ARPS (Closed End Auction Rate Preferreds). Most of us who "can't get out" were involuntarily placed in CE ARPS, which the author argues were worth 60% of par at their very creation. A true ponzi scheme.
http://www.stockbroker-fraud.com/lawyer-attorney-1284530.html
We need to be suing the funds, Nuveen et al., directly. Because as Jim pointed out long ago, FOLLOW THE MONEY. We are their preferred shareholders. They not only have our money, they have $3 for every $1 of ours they are holding hostage.
PS Kelly, we were also with Citi and asked them to hold cash. Never heard the word "auction" or "failure" till the fateful phone call in February. Never saw a prospectus. It was Citi's standard operating procedure. Don't feel stupid, they did the same thing to everyone.

I just met with some financial advisors who were familiar with the situation. As many of us have found out, we purchased a variable rate long term note with a maximum interest rate nobody ever was told about. The auctions are failing because the spreads at maximum rate are too low to clear the market. Nobody knew that there were any maximum rates.

However, the financial advisors did believe that for triple AAA securities of good quality, the maximum spread (say over Libor) was attractive and if spreads return to more normal levels over times, the ARPs could trade at par.

To begin with many thanks to Lisa, you've been all over this issue and your thoughtful and knowledgeable comments are appreciated.

To those who say we have to get organized you're correct. WE HAVE NO VOICE and we need to be heard!

Write, fax and call your Senators and Representatives about the problem. Be persistent and insist that they help. They have to realize the size of this problem and that it effects a wide range of people from the elderly, to ordinary middle class families to the wealthy. The investment companies sold these in units of $25,000 not $25 million and there were a lot of people ripped off.

The situation with the economy is serious; I wasn't alive during the 1930's but I believe that what we're going through today maybe analogous to that period. This country is in a liquidity and credit crisis cause by the greed that created so many derivative products that add nothing to our economy.

Here is another lawyer handling claims: Bryan Ball: 866-240-6177

There may be some news coming from Nuveen on these ARSs. I called Nuveen yesterday (wednesday) and they said that there was no update and that they wouldn't hold a conference call until there was something to report. I called today the customer rep said that they have made "progress" and they are going to go to the board for approval (on whatever solution they have come up with). The person I spoke with also mentioned that there probably will be a call set up next week to update investors.

Fingers crossed for some good news....

Everyone needs to look at this, especially section .2.4. This was promulgated in I believe 2007 but work began on it in 2006: http://www.sifma.org/services/pdf/AuctionRateSecurities_FinalBestPractices.pdf

I am investigating legal options for a client who has $25 million tied up in these securities. I'd be interested in speaking with people who have information about the tactics that were used to sell this stuff. We are at www.girardgibbs.com.

Merril offerred a margin account at 1.50 over libor and an amount equal to 50% of par even though the ARPs are paying 125 over libor. Further, Merril determines that the value of the ARPs have fallen in value so the loan equals 70% of the Value, Merril can make margin calls. Beware of these margin loans.

I aslo want to congratulate Lisa, she has been all over this for everybody.

Does anyone know if the Money Market Solution applies to the Taxables as well ?

FYI: Eaton Vance held a conference call on the 4th and will hold conference calls on March 14th and 24th again (888) 562 - 3356 acces codes:

March 4th ( Replay) 37152796
March 14th, 37155499
March 24th, 37156414

Regards,

Jorge

My update for today

1) some legal progress is actually being made on the class action front. I have no guarantees yet, but the process is moving forward. I will keep you posted. The hope is that this way everyone will minimize or even eliminate their legal fees in recovering principal and not have to "go it alone."

2) I am all for writing to senators and reps too, but I think perhaps the more direct route is to cal the SEC. It's their job to investigate this stuff. A fellow CE ARPS sufferer has given me the following contact info:

Mark Schonfeld, New York Regional Director, SEC
(212) 336-1100; newyork@sec.gov

Deluge them.

Oh and one more thing, for everybody.
Even if you think you have already, direct your broker, in WRITING, to 1) liquidate your CE ARS at 100% face value immediately via auction or any other means; 2) provide you proof that your actual holdings have been offered at each possible auction; and 3) provide you with all relevant written results of each auction in which your security participated.
If your broker is not doing this, your injury is continuing.