Yesterday, Palm (NASDAQ: PALM) had to add $25 million to its losses for last quarter due to a write down in the value of auction-rate securities. Public companies are likely to have to do more of that as they report their first-quarter numbers. A number of individuals will also get brokerage statements that will show that each dollar they have in the instruments is now worth as little as 80 cents.
The bonds produced by the auction-rate market have been considered the equivalent of cash since the market began in 1985. The auctions were run frequently by big banks, so getting money in and out of the paper was easy. But, late last year and early this year, the banks that made the market in the instruments effectively shut the system down. Part of their role was to take excess securities in each auction and hold them until the next set of trading They could sell them then. But, in a tight credit market, banks did not want to hold the paper on their balance sheets.
Now the SEC and Financial Industry Regulatory Authority want to know if brokerage firms and banks marketed the auction-rate securities as cash equivalents while knowing that they were not. According to The Wall Street Journal: "Brokers had pitched auction-rate securities as liquid, super-safe investments with interest rates slightly superior to those of conventional money-market funds. Now investors are asking why they weren't warned about the possibility of failed auctions."
The entire value of auction-rate investments now in the market is nearly $360 billion. Most of those securities are not trading now, so companies and individuals cannot get their money out. That may make for one, very large class action suit or a series of smaller ones by investors who want their "cash."
Douglas A. McIntyre is an editor at 247wallst.com.
Just how high will U.S. gasoline prices rise?
Nordstrom and Kohl's post smaller-than-expected Q1 profit declines
Oil hits record $127.43 on supply concerns, raised Goldman forecast
Reader Comments (Page 1 of 1)
4-08-2008 @ 2:02PM
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.
Every asset -- including illiquid Auction Rate Securities -- has value, it's just a matter of discovering the price.
So, we've created an electronic secondary market at ESER.org that allows investors to directly buy and sell Auction Rate Securities.
The idea is for http://www.eser.org to enable price discovery for illiquid Auction Rate Securities.
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.
As an alternative, we're running ESER.org (Electronic SEcurities Registry) as a 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.
A vibrant electronic secondary market may allow investors to cash-out of these illiquid Auction Rate Securities at a slight discount.
-ESER.org Auction Rate Securities secondary market: ESER.org
4-09-2008 @ 6:08AM
Serge Birbrair said...
I am one of the victims of this debacle and here is what one should do as the first steps:
http://www.nothingcontroversial.com/forum/showthread.php?t=5690
The SEC, local legislators, general and investment public should get involved.
Lots of the now illiquid money were earmarked for...purchases of Real Estate. How can we keep the prices of real estate from falling when $330,000,000,000 are locked for indefinate terms?
4-09-2008 @ 6:11AM
Serge Birbrair said...
ESER, you wrote:
"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."
Being a good Samaritan I am, I am offering you 25 cents on the dollar, CASH, your problem is solved and you can now close ESER which is taking advantage of people in distress.
4-11-2008 @ 2:56PM
ESER.org said...
Dear Serge,
ESER.org is a not-for-profit public service. There are no fees or commissions or advertisements.