Auction-rate securities were supposed to be cash equivalents. Individuals and companies could move in and out of them in a day. The financial instruments have existed since 1985. In an auction, any imbalance in securities bought and sold were picked up by banks and brokerages and sold at the next event. These auctions went on as often as several times a week.
The problem with the market is that when banks started to run low on money, they pulled their commitments to run the auctions, the market fell apart, and the securities do not trade. Because they are illiquid, their values are falling.
Many companies put cash into auction-rate paper to get a slightly higher yield than with government securities. The firms even put the money on their balance sheet as cash equivalents. Now that practice is haunting them.
Several technology firms are stuck with these investments. According to The Wall Street Journal, Monster (NASDAQ: MNST) had $357 million of this paper at the end of last year. Palm (NASDAQ: PALM) had almost $75 million at the end of February. The companies are going to have to write-down some of the value of this capital which will affect their earnings.
The problem cannot really be blamed on the companies. The market for he paper is over 20-years-old and has functioned like clockwork until recently. It does raise the specter of lawsuits against the banks and brokerages who made the market. They positioned these securities as cash and then pulled the plug on the auctions.
It is one more headache for financial companies in trouble, but in this case, they probably deserve it.
Douglas A. McIntyre is an editor at 247wallst.com.
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Reader Comments (Page 1 of 1)
4-08-2008 @ 12:52AM
ESER said...
As yet another unfortunate investor in these Auction Rate Securities, I've been befuddled that I can negotiate a price for durable goods on EBay any day-of-the-week, but I can't get my stock broker to find a buyer for my Auction Rate Securities -- no matter what discount I'm willing to sell at.
So, we've created an electronic secondary market at ESER.org for investors to directly buy and sell Auction Rate Securities with one another -- independent of the brokerage houses.
It's frustrating that none of the banks that have previously back-stopped the auctions of these securities are willing to step in and redeem the issues from their clients.
The decision of the Wall Street Banks to terminate back-stopping auctions of these securities has cut a swath right through the investment world -- from mid-size investors such as ourselves to large corporations.
We're running ESER.org (Electronic SEcurities Registry) as a sort of public-service: sellers are free to list their Auction Rate Securities for sale; and buyers are free to browse the listings and negotiate pricing and settlement with the sellers.
Hopefully, a vibrant secondary market, such as ESER.org, will allow investors to cash-out of these illiquid Auction Rate Securities.
-ESER.org (Electronic SEcurities Registry)