Public companies with auction-rate securities on their balance sheets were, in many cases, forced to write-down the value of those assets because they have become illiquid. Firms took on the investments because they were considered as easy to buy and sell as cash, but offered better interest rates. Then the market for the securities stopped trading.

Under GAAP, the companies holding the auction-rate paper had to take a P&L charge.

According to The Wall Street Journal, "According to a study of earnings reports conducted by securities-valuation firm Pluris Valuation Advisors LLC, 402 public companies disclosed that they held variations of auction-rate securities. Half had written down the value of their holdings. Of those that did, the average markdown was 13.2%, the study shows."

What investors should watch for is the companies which have not acted, because they could face a significant hit in future quarters. That, in turn, could mean a sell-off in their shares. Some companies which do not have huge amounts of cash, could actually face a credit squeeze.

Several fairly big and, one would think smart, companies that took a haircut in Q1 include Google (NASDAQ: GOOG) and Starbucks (NASDAQ: SBUX).

Douglas A. McIntyre is an editor at 247wallst.com. He is also the author of the Ten Stocks Under $10 letter.

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.