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

It is really important that Congress put a lot of pressure on the firms that created and sold these Preferred and Auction Rate Securities to see that there is a quick and equitable solution to this problem that makes us whole. I strongly suggest that we all write and fax the Chairman of the Finance Committee, Congressman Barney Frank. This is the address:

The Honorable Barney Frank
United States House of Representatives
2252 Rayburn House Office Building
Washington, D.C. 20515-2104
DC Phone: 202-225-5931
DC Fax: 202-225-0182

We have all now had some time to think about this. I received my monthly statement today from UBS. The statement had a flyer inserted. The flyer stated that the heading for the ARPS will be changed and will no longer be called a cash alternative. Also, they will be revaluing the shares. I can see it now, a new fail rate of 1.5 x the new interest rate of 2% for a fail rate of 3%. A new value on the statement of $17,500 instead of $25,000. Now the yield on the shares will be 3% on 17,500.
I have been calling my broker every day. He only says that they are working on a solution.

Of course, they were marketed to me as a 7 day Nuveen fund. The money would be available every 7 days. I have a feeling that we are going to go a long time before we get 100%. Any solution in the making will include a write down. My question is - should we accept a lower price and then go back for the balance and damages?

Another real issue is the fact that the brokers knew in advance that these auction were going to fail. They knew this because they had been supporting the auctions and preventing the failing by buying the remaining shares. If your broker had called and told you that the auction was going to fail and explained the resulting crisis, you would have gotten out. Like I say, they knew the end had come but kept it quiet. They allowed the auctions to fail and knew in advance that their actions would cause this.

There is hope !!

Commentary
PDF Print Page March 2008
A Message to Auction Rate Preferred Shareholders

Given the events of recent weeks, many closed-end fund sponsors have proactively reacted to the failure of their auction rate preferred securities by posting commentaries or hosting calls regarding the impact of this event on their closed-end funds and on the closed-end fund industry generally.

However, fewer sponsors have addressed the impact on the actual preferred securityholder. In the weeks and months to come, we expect two opposing forces—both claiming to offer resolutions—to enter the arena and battle for attention:

The Contenders are the sound alternatives that sponsors will employ to alleviate this liquidity event in the best interest of shareholders.
The Pretenders are those ideas that intend to take advantage of investors' desire to get liquidity through whatever means possible.
We believe that it is vitally important for advisors and investors in auction rate securities to carefully weigh those offers made from outside the closed-end fund sponsor community. To help, we offer the following summary.

The Contenders
It is important to understand that every closed-end fund sponsor that has exposure to the auction rate securities market is working around the clock to identify potential solutions. To put the task at hand in perspective, there are two main goals that we at Calamos are working toward:

Provide liquidity to shareholders of the auction rate securities.
Reduce our reliance on the major money center banks for liquidity.
These solutions must address the interests of the preferred shareholders as well as those of the common shareholders of our funds. At this time, there are multiple solutions that are being evaluated, all of which will generally require thoughtful consideration and analysis in addition to approval by the funds' senior management and Board of Trustees.

In the end, the solution we settle upon as a sponsor must address our intent to return dollar for dollar the investment that the preferred securityholders entrusted to the funds while maintaining the interest of the common shareholders who account for a majority of fund assets.

The Pretenders
In any market, whether it be financial or other, "necessity is the mother of invention." As investors continue to look for liquidity, there will be alternatives that are suggested and potentially launched. From a sponsor standpoint, it is important for both advisors and preferred securityholders to know that we are working toward a quick and marketable solution while avoiding exploitative proposals that look to prey upon our financial advisor customers and their clients.

The auction rate preferred secuities remain dollar good. The current situation was brought upon by a liquidity event and is not credit-related in any way. Ratings remain consistent and strong. If we pursue refinancing, the securities will be redeemed at par, not at a discount. We understand your frustration over the past two weeks but want to make it clear that we are working toward a solution that will support your continued confidence in Calamos, as well as the general closed-end fund market.

The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Information contained herein should not be considered investment advice.

Calamos Advisors LLC

One fund company is starting to redeem their Auction Rate Securities....lets hope others follow suit!

Aberdeen Fund to Redeem Auction-Rate Securities (Update3)

By Christopher Condon

March 7 (Bloomberg) -- Aberdeen Global Income Fund Inc. plans to buy back all its auction-rate debt, the first closed- end fund to take the step since the market seized up in mid- January.

The fund will redeem $30 million of auction-rate securities known as preferred shares, replacing them with loans from a major financial institution, the fund said today in a statement.

About half of all closed-end funds used the auction-rate market to finance additional investments in government and corporate bonds, a strategy aimed at boosting returns. Auctions began failing as investors fled all but the safest government debt, leaving preferred shareholders with about $60 billion in securities they couldn't sell.

The news may put pressure on other fund managers to buy back auction-rate debt. Many brokers marketed the securities as a short-term investment similar to a money-market fund.

``Its encouraging that Aberdeen has done the right thing,'' said John Dwyer of Duxbury, Massachusetts, who has $650,000 stuck in auction-rate preferred shares. ``It's a great model for how all the issuers should behave.''

Dwyer doesn't hold shares in the Aberdeen fund.

The fund, which is managed by Aberdeen Asset Management Inc. of Aberdeen, Scotland, trades at a 12 percent discount to its $127 million in net assets. The stock has returned 9.1 percent annually in the past five years, compared with 12 percent by the Standard & Poor's 500 Index.

Nuveen, Eaton Vance

Managers including Chicago-based Nuveen Investments Inc. and Boston-based Eaton Vance Corp., have resisted buying back their preferred shares, saying it would hurt their common shareholders. The companies, the largest closed-end fund managers, have said they are in talks with major banks aimed at bringing new liquidity to the market. The companies didn't immediately return phone calls seeking comment.

While Aberdeen is the first fund to announce a redemption, it won't be followed by many others, said Cecilia Gondor of Thomas J. Herzfeld Advisors Inc. in Miami, which specializes in closed-end fund research.

In addition to being a small fund, she said Aberdeen Global had a maximum interest rate, which takes effect when an auction fails, considerably higher than most closed-end funds, giving Aberdeen more incentive to refinance.

Other fund managers have said their funds still a higher return from their investments than they pay in interest to preferred shareholders.

Aberdeen declined to comment.

New Security Explored

Eaton Vance has said it would like to replace its preferred shares with a new form of debt that money-market funds could buy. Money funds are barred from buying securities with maturities longer than 13 months, unless they hold the right to sell back to the issuer at any time.

Joseph Benevento, head of U.S. cash management at Deutsche Bank AG, said he didn't see that plan moving forward.

``Money market funds would require a liquidity facility to be eligible and liquidity does not come cheaply right now,'' he said.

Yes, but the end of that article still scared me:

"While Aberdeen is the first fund to announce a redemption, it won't be followed by many others, said Cecilia Gondor of Thomas J. Herzfeld Advisors Inc. in Miami, which specializes in closed-end fund research.

In addition to being a small fund, she said Aberdeen Global had a maximum interest rate, which takes effect when an auction fails, considerably higher than most closed-end funds, giving Aberdeen more incentive to refinance."

However, now that Aberdeen has done this and Calamos might be following suit, the funds that refuse to will not look too good. Especially if Aberdeen's common doesn't "tumble" like they all claim to be so worried about. Seems like all of our jobs on Monday should be to look up the managers and in-house counsel of our "funds" and demand the same solution, by phone, followed up by email and a statement of our commitment to legal action.

I'm sorry to hear of the pain and suffering this mess is causing all of you. I've learned a lot reading this site. I'd like to outline my situation and would appreciate any comments.

My broker sold me AAA insured ARS backed by student loans - not the closed-end fund variety. It was the usual vague higher interest rate with short term liquidity sales pitch, no prospectus.

He admits that I did specifically ask the right questions about liquidity and was given totally inaccurate information (i.e. the bank was the underwriter when the bonds were issued so they'll buy them back if an auction fails). He has supposedly made a formal written appeal to bank senior management to buy them from me as they/he committed to do.

Plan A is to see what my broker can get done for another week or so. Right now I might have some small bit of leverage, namely other deposits of roughly 3x the amount tied up in the ARS plus the prospects of expanding their business with me in the future. I'm hoping they'll realize that paying me off might be cheaper than having me pull everything out. Given the enormous scale of the problem, this is probably optimistic thinking.

Plan B will be to continue putting pressure on the bank while seeing what kind of new channels of liquidity might materialize over the next 4-6 weeks. I know the whole auction process is being written off as dead but I feel like auctions could settle down a bit for relatively high quality bonds - again, might just be wishful thinking. The supply of ARS will soon dry up substantially as many issuers refinance to avoid punitive failed auction interest rates. That will take some time but I would think we will either see some positive impact from that (or not) within about 4-6 weeks.

I suppose Plan C might be to sell the stuff at some discount, pull all my funds from the bank and pursue legal options to recover losses. I hope it doesn't get to that.

Any comments or suggestions?

I will post any significant new information I learn.

Lisa, we keep hearing from Nuveen, Eaton, Pimco that redemptions can't be done for many reasons (fudiciary responsibility, the issues with deleveriging, etc). Aberdeen's Global Income stock fell by a meger .6% yesterday after announcing this (on a day when the Dow fell by 1.2%). We should not except excuses by Fund Companies that this isn't an option when now at least one company thought this was the most fair solution.

Some random thoughts; when you read the following it makes you ask who was representing the Preferred Unit owners when they made these decisions to through the preferrd owners under the bus?

"Managers including Chicago-based Nuveen Investments Inc. and Boston-based Eaton Vance Corp., have resisted buying back their preferred shares, saying it would hurt their common shareholders."

Most of asked the right questions when we purchased; the fact is that we were lied to and told stuff that wasn't true. Remember that the individual investment advisors have a responsibility as well and they have insurance. I plan to hold my investment advisors personally responsible to the fullest extent possible by law and believe that you or your attorneys should put them on notice.

Remember these people are licensed professionals with responsibility and they've made money off of selling you these products! being nice to incompetent people should not be considered, they really screwed up and if they were lied to let them point their fingers at their own investment brokerages or banks that employee them and at Nuveen, Eaton Vance, BlackRock and the others who may have lied as well. I know that Nuveen advertised these as being cash alternatives and liquid. In fact what I was told were true auctions seem to be some guys sitting in a smoke filled room setting prices.

Bob wrote that he hoped putting pressure on his brokerage house might get him his money. I wish him well but I think their attorneys aren't going to want to set precedents that could be used against them in court and arbitrations.

The major term never disclosed on top of everything else was the existence of low maximum rates which prevent the security from clearing in the auctions. It is really not an auction since the rates can not be bid freely above the maximum rates. This term affects the liquidity and value of the securities.

As a lucky survivor of the recent ARS situation, I just wanted to give you guys a couple of links to some valuable information in your search for solutions to this problem. The first is a link to Capital Advisors Group which is an investment advisory firm that has expressed serious reservations about the ARS market since 2003. They have written some excellent pieces warning of this very meltdown. You can find out more at:
http://www.capitaladvisors.com/landing.html The second links you to Harry Newton's website. He provides excellent regular updates and has a personal interest in this since he has several million tied up in the auction rate preferreds. His link is:
http://www.technologyinvestor.com/index.php Be sure to go back and read his previous columns as well. Good luck to everyone!

Robert, you say, "I know that Nuveen advertised these as being cash alternatives and liquid." Do you have a link to that or a source on it? I'd like to see that.

New York Times picking up the story

http://www.nytimes.com/2008/03/09/business/09gret.html?pagewanted=2&_r=1

Well im two frozen in ARPS, the lawsuits are going to come, and acome but won't help this issue.

This is simply a run on the bank, The run of all runs. For twenty years it worked fine, then when some accounting law changed and corporations wanted all the money at once. where did they think the money was going to come from.

You can blame the brokerage firms, You can blame the Fund Companies, You can blame the investors.

This will be solved but it is going to be painful.
and Here is why.

The ARPS market that is the leverage for closed end funds is 300 billion, if one firm starts making a market, everyone will dump to them. So that wont happen.

So the Fund Companies will have to find alternative financing for there leverage, but this is alot of money, and the banks don't have this kind of leverage in the states.
The small fund companies that have a few closed end funds will have an easier time getting Credit Facilities for there closed end funds. The Big ones will have harder times.
How they might do it, is sell a % of the company to a soverign wealth fund(they are the only ones that have money) that will also set up a lending corporation to there closed end funds.
But this will come at a cost to the closed end shareholders in higher cost of borrowing, which will then make the dividends be cut.

The other thing that will happen if the funds can't find financing, is when the lawsuits pile up there will be forced to sell investments to pay off the auction rate securities. This will hurt the common share holders, and be painfull for the over all market.
I believe that until this problem is resolved you wont see the stock market rally, you wont see the muni bond market rally.

This is going to be painful.

But in the end the auction rate securities holders will get there money back, it might take time - i think from 3 months to 2 years. depending on the fund company.

Bill, Nuveen published a brochure a brochure titled "Nuveen MuniPreferred" and let me give you some highlight verbatim excerpts:

"Divivends paid weekly"

"Cash alternative before choosing your next longer-term investment"

"Attractive after-tax yields and weekly liquidity"

Now how any corporate attorney could let them publish such mis-leading information is beyond my belief. There is some disclaimer information in smaller type at the back of the brochure. Of course they don't speak about a very flawed auction system that the SEC fined. This auction process seems to be more of a group of people setting prices?

If you would like an e-mail copy post your e-mail address.

VERY IMPORTANT: We must all call and write our Congressman (as well as Representative Barney Frank), our senators and any news media member you may know if you have an interesting human interest story to go with it.

Just heard back from an email I sent to Tom Fuast who is the CEO of Eaton Vance....he commented on the Aberdeen announcement by stating they are 'pursuing a similar course as well as other alternatives for restoring liquidity to APS holders'. My advice to everybody out there is to reach out to the senior executives of these firms and let them hear your voices.

Besides for the High Net Worth Account Reps at these investment banks not informing clients of the potential illiquidity in the even of a failed auction, they failed to let clients know that the maiximum interest rate could be as low as 4% or as high as 15%. The 15% paper I can get out of since investors will bid it and own it for less 7-12%. the problem is the low max rate paper 4%, no one wants. These investment banks never sent out any prospectuses to me nor did they ever advise on me on the huge variance of interest rates in the even of a failed auction. I will be filing lawsuits against CitiGroup and Morgan Stanley. If anyone has tied up more than $5 million in these ARS securities and wish to explotre suing these investment banks, please let me know since I am interviewing attorney's right now. This is 1000% clear cut negligence and breach of the fidiciary responsibilities of these investment banks. My email address is LLStone@Earthlink.net.

My broker sold me $1,000,000 worth of ARP’s in different funds.
I have filed a formal request for a malpratice claim against the brokers E & O insurance. Since most brokerage houses are self insured and must act under the rules of all insurance companies when claims are presented. They open themselves up to bad faith claims for failure to properly respond. Considering the opposing forces at play, doing the right thing as an insuror places them at odds with themselves. My hope is they act improperly and I will have a more valid claim against them for bad faith which will not be tied to the investment issue at all. It becomes a complete seperate issue, and can place tremendous pressure on these firms if everyone pursues this. Being in the insurance industry has made me aware of this angle, should an insuror act in bad faith, the claim for damages can far outweigh the losses in our frozen securities. I encourage everyone to file a written request to open a formal claim. You do not need an attorney to do so.

Comment by Mike L - March 9, 2008 at 12:21 pm

Our money was parked at Calamos while we hunted for our new home. The money represented all the proceeds of the sale of our business. We were talked into this by money managers at Comerica Bank who told us this was just like a CD good as cash. They knew we were house hunting!! Now, they are giving us smoke and mirrors about irrelevant funds and meetings having nothing to do with Calamos. I can't believe they put our money into this just a couple of months ago and I saw an article discussing failures back in September 2007.
We are sick over this and cannot talk about anything else.
We are not seeing anything that looks positive even though the bankers are saying all is well. Now we find out that the "security" has NO maturity date - NO DATE!!
Does this mean we made a perpetual loan to Calamos?? If anyone has heard of anything positive, please share. Thanks

Does anybody have a handle on the extent of this problem? It is enormous but how much so? I hear a figure of $60 billion for the ARPS issued by the closed end equity and income funds, a Nuveen variant of which I have. All $60 billion of that seems to be of the type with the reset cap which is causing the liquidity problem. Then there's $300 billion tied to the municipal market. But it's unclear of that how much has the higher reset level and how much the lower reset, and therefore how much is illiquid. As an aside I watched a clip on the net of the James Steward interview on CNBC; it's apparent he's come to his senses on the reality of this. I first had to endure an ad with Sam Waterston telling me how much TD Ameritrade could help with my investments. That's who sold me this thing.

Bill