A number of corporations bought auction rate securities with their excess cash. They believed that since the instruments offered better yield than many market funds, they would be good for balance sheet management. They also thought that since auction-rate paper had been liquid and widely traded since 1985 that moving in and out of the market would be easy.
It was easy until it wasn't.
The investment banks and money center banks which made the market in these instruments pulled out at the beginning of the credit crisis. They did not want to keep risking their own capital to buy the paper and hold it to keep the market trading. Traditionally what was not bought at one auction was picked up by banks and held until the next round of trading. In essence, large financial firms kept the market trading by underwriting the system in exchange for large commissions.
A new study shows that financial executives at companies which bought the securities would make sure they kept their value even if the market broke down. According to the FT, "More than 85 per cent of companies that invested in the collapsed market for auction-rate securities thought Wall Street banks would provide support during crises." The results are from a survey by the Association for Financial Professionals.
What companies which bought into the market did not do was read the fine print in their sales agreements. The guarantees which they thought the banks provided simply were not there.
It is hard to believe that sophisticated CFOs and treasurers at large companies could be taken in. But as they say, a sucker and his money are soon parted.
Douglas A. McIntyre is an editor at 247wallst.com.
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Reader Comments (Page 1 of 1)
6-30-2008 @ 11:50AM
David Huston said...
What the investment banks were apparently doing, however, was continuing to hawk the illiquid auction rate securities as though nothing was amiss: a kind of Ponsi Scheme by the big guys used largely against individual investors (I'd bet that the corporate investors were out tf the market by the time it froze like a jiffy pop.) Massachusetts California and others are bringing actions as we speak to redress these grievances.
6-30-2008 @ 3:03PM
John Rausch said...
If the "suckers" received the same fine print that I did (none), they would not have known about the many risks associated with ARS. No prospectus was provided to anyone that I have heard about. When I finally found a prospectus in HTML format for my ARS, the risks went on for several scary pages! Someone, please tell us you were given a prospectus for the ARS you are stuck with. Or even tell us that you knew which ARS you were buying before they were presented to you. Most people thought they were getting into a money market or CD equivalent.
6-30-2008 @ 8:47PM
kicking ARS said...
Mr McIntyre...as the MA. SEC has discovered in their FRAUD investigation, this is turning out to be a case of WHITE COLLAR CRIME and a CLEAR CASE OF FRAUD. We are not "suckers". We were LIED to by a bunch of SCHEMING CORPORATE CROOKS from the biggest wealth manager in the world.
6-30-2008 @ 10:48PM
bruce said...
you must get paid by national radio broadcasting group because i never have seen someone kiss the behind of some group they way you knock siri and xm the way you do. usually after a good day.
you should be candid. tell the truth about your short term goals. this happens all the time with you
7-01-2008 @ 8:14PM
steve said...
The "advisors" at TDAmeritrade sought me out and sold me closed end muni funds bankrolled with these ARS funds. I bought because it was presented as "the same as money markets" with a seven day auction cycle that would allow me to exit when ready. That was mid-January 2008. Clearly the handwriting was on the wall...and either Nuveen or the TDAmeritrade bozos had to know exactly what they were selling. If they did know, it's fraud. If they didn't, they're idiots. Maybe both.
7-03-2008 @ 8:22PM
erik said...
Suckers,thats not very nice, these people worked hard for their money, put faith and trust in america and its system, believing that 5% or a tad more, say what cd's were paying was pretty safe, I mean 5% these things should be 8%. ARS were a complicated illusion.
7-30-2008 @ 12:40PM
Kathy said...
We explicitly told our UBS broker that we wanted our money in a safe, liquid, dollar-in-dollar-out investment. He put it into perpetual bonds. No prospectus. Nothing about how UBS was already supporting (manipulating) the auctions, that auctions could fail, that we could lose our investment or never get the principal back. And all the while, UBS execs were selling this stuff because they didn't have the "risk tolerance" to hold it.
What part of "fraud" don't you understand?