Auction Rate Securities (ARS) anniversary: A year of pain and battles

Posted Feb 27th 2009 12:05PM by Peter Cohan
Filed under: Financial Crisis

It was a year ago today that I wrote my first post on Auction Rate Securities (ARS). That was when people who thought their money was in something safe, like a money market fund used to be, found out their funds were frozen. And 7,678 comments later, there are still people who have not gotten their money back. But it isn't for lack of trying -- they've contacted regulators, journalists, and Congress in their efforts. Some have succeeded and some have not.

The $330 billion ARS market was originally created for companies to park their short-term cash safely while financing various municipal projects. The rates on the ARS would reset in weekly or monthly auctions. But then a change in an accounting rule made it unattractive for companies to invest in ARS. So in order to keep the ARS market from collapsing, brokers started to support the auctions themselves and pushed hard to dump those ARS on their unsuspecting "wealth management" customers -- e.g., individual investors.

The brokers continued to do this until a year ago. That's when those individual investors found out that their savings had effectively gone up in smoke. Some of these people have gotten their money back after months of struggle. I can only imagine how much stress they suffered. Others are still waiting for a resolution and their pain in the ARS (pun intended) has long been replaced in the minds of those who rule the media by the suffering of others -- such as the Madoff and Stanford victims.

If you are still fighting to get your money back, you have not been forgotten. For those who have not been sucked into this ARS mess, the lesson is to keep control over your money and not let brokers get their hands on it.

Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book is You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing.

Tags: ARS, Auction Rate Securities, AuctionRateSecurities, featured

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Reader Comments (Page 1 of 1)

2-27-2009 @ 1:07PM

Harry Newton said...

I write a huge web site devoted to auction rate securities.
Anyone and everyone is invited to visit it: www.AuctionRateSecurities.org

2-27-2009 @ 6:27PM

steve said...

Peter--thanks for your coverage! Many of us still stuck feel totally forgotten. The government has all kinds of programs for people that over-spent credit cards, bought houses with nothing down. Our sin was taking the advice of our brokers in buying AAA+ rated bond funds because we wanted safety and liquidity. No help for the government for us. Cuomo? Useless. SEC? Don't care. State regulators--too busy. Please keep writing about this problem...maybe we'll get our money back eventually.

3-26-2009 @ 3:14PM

senseoncents said...

I have been writing about the ARPS travesty at my site, Sense on Cents, for the last few months.

I discovered in reading FINRA's 2007 Annual Report, published in Spring 2008, that they owned $647 million ARPS as of 2006 year end.

I am working to get that information more widely publicized. Does FINRA still own these securities? Did they sell? When did they sell? To whom did they sell? What price?

My most recent piece has links embedded to all my previous work. Additionally, FINRA's investments are highlighted on pages 47-50 of their Annual Report which is embedded in my posts.

http://www.senseoncents.com/2009/03/will-tarp-screw-arps-even-tighter/

I hope this information becomes more widely publicized and helps every individual involved.

If you find the information interesting and helpful, please forward my work as far and wide as possible. Additionally, please visit my site and leave comments.

Best,

Larry Doyle
Sense on Cents

3-27-2009 @ 3:32PM

mark said...

Despite the various settlements, many have been left out in the cold. It's time to go after the issuers and hit them where it hurts - their management fees. How? Start selling any open ended funds you may have until the issuers that have remained silent start causing the funds under their control to redeem.

There are enough equivalent funds out there to do this without affecting a portfolio.

Let's start a groundswell of redemptions. I'm starting with Dreyfus. I've redeemed all of my Dreyfus Money market funds and other open ended funds and bought similar portfolios from issuers that didn't use this technique to boost returns.

I urge all to do the same and to let the fund managers know why you are closing their accounts.