Imagine your broker parked your funds in an account that he said would be as safe as a money market fund but offer slightly higher yields. If you went for that line, you might now be among those who hold the $330 billion worth of Auction Rate Securities (ARS) whose weekly price-setting auctions stopped working in February. Now, Bloomberg News reports that those who are trying to get at their funds through arbitration will be lucky to receive 22 cents on the dollar.

I first began posting on the ARS market back in February. Since then 5,482 comments have appeared from people trying to unfreeze their funds from what their brokers told them were safe investments. Massachusetts and New York have sued one of the ARS hawkers -- UBS AG (NYSE: UBS) -- thanks to e-mails that indicated that when the ARS auctions failed, UBS decided to dump this toxic waste on individual investors rather than take the losses on its own books. New York's attorney general found that UBS executives sold $21 million worth of their ARS holdings before launching this campaign to dump them on the public.

Many are now trying to get their money back through a process called arbitration. If your claim is above $50,000 you will face a panel of three judges, two "public" and one of whom represents the ARS industry. Bloomberg reports that the process for choosing the panelists virtually assures that consumers will be judged by a representative of the industry that defrauded them. So it's no wonder that arbitration rulings have given investors enormous haircuts.

The New York Times reports that Andrew Cuomo, New York's attorney general, has sued UBS AG (NYSE: UBS). He charges UBS of deceptive sales practices. Massachusetts beat him to that punch when it sued UBS for deception after revealing e-mails indicating that UBS decided it would be better to foist the toxic waste on its naive wealth management customers rather than taking the hit of writing down the holdings on their books.

I began following the Auction Rate Securities (ARS) market -- those bond-like securities whose rates used to reset in weekly auctions -- back in February when those auctions failed. Since then 5,341 comments have appeared from people whose hard-earned cash is frozen in what was marketed to them as safe, money-market-like securities with slightly higher yields.

I credit Cuomo with adding a useful detail to the brief against UBS. He points out that UBS senior executives were selling $21 million worth of ARSs as its brokers were desperately pushing the toxic waste onto their individual customers. This reminds me of the same kind of deception we saw during the dot-com era when an analyst, Henry Blodget, wrote bullish reports about companies that he trashed in e-mails to his colleagues.

The Independent reports that Citigroup's (NYSE: C) Smith Barney took the $100,000 entrusted to it by a 76-year old mother and put it in now-illiquid Auction Rate Securities (ARS) -- bonds whose interest rates are supposed to reset in weekly auctions -- without her understanding. After she died earlier this year, her son discovered that what she had told him was "in an easy-to-sell money market fund" was in fact frozen in ARSs.

Since February, when I first posted on the $330 billion ARS market, a forum has gathered with 3,924 comments from people who have much of their savings frozen. This widow, like many of the people who comment there, had their money moved into ARSs without their knowledge or with the assurance that the money would be safe and would offer a higher than average return. One key question: Did ARS purchasers receive prospectuses or know of their risks?

But last year, an accounting rule change caused demand for ARSs to evaporate since companies could no longer account for them on their balance sheets as "cash equivalents." So the banks started to bid on the auctions themselves to keep the market going. But thanks to the credit crunch, banks no longer had sufficient capital to prop up the market. So the auctions failed and thousands of people, like this widow, have found that they can't get their money.

The New York Times reports that the market was up 190 points yesterday and has risen 11% in the last few weeks. Not only that, but AP says that the jobless rate fell to 5% in April -- better than the expected 5.2% rise. So does this mean that happy days are here again? No. And you should use today's rally to take money off the table if you have any.

Why? Things are not good for the consumer who accounts for 70% of economic growth. My mailman stopped me yesterday after my run and gave me a grim look. He is very friendly and talks to many people on his delivery route and elsewhere. And he told me that with gasoline prices so high, many people are canceling their vacations so they can pay their bills.

As I posted here, gasoline prices are gobbling up a bigger and bigger piece of the median family's income. And USA Today reports that worldwide food prices have skyrocketed 45% -- sending consumers on a recession diet. Businesses are having trouble getting money from banks because the banks still have $500 billion in hard-to-value assets which requires them to hold onto every scrap of capital they can get.

The list of companies slapped by the auction rate securities debacle continues to grow. This morning, Lakes Entertainment (NASDAQ: LACO) issued a press release announcing an agreement with UBS AG (NYSE: UBS) that's worth quoting verbatim:

... effective April 11, 2008, it entered into a client agreement with UBS Financial Services ... for the purpose of borrowing and/or obtaining credit in a principal amount not to exceed $11.0 million ("Margin Account Agreement"). The Margin Account Agreement is secured by Lakes' auction rate securities ("ARS") held at UBS ... As previously announced, the types of ARS investments that the Company owns are backed by student loans, the majority of which are guaranteed by the U.S. government and all of which have credit ratings of AAA or Aaa. Historically, these ARS investments have been highly liquid, using an auction process that resets the applicable interest rate at predetermined intervals, typically every 28 days, to provide liquidity at par. However, as a result of the recent liquidity issues experienced in the global credit and capital markets, the auctions for all of the Company's ARS investments failed beginning in February 2008 when sell orders exceeded buy orders.

No 8-K detailing the terms of the margin account agreement has yet been released, so we don't know what interest rate they're paying for the credit. But it may be higher than the yield on the auction rate securities that UBS sold to them.

Here's what makes this situation a mess. UBS was recently subpoenaed by New York Attorney General Andrew Cuomo, seeking information about whether the firm misled investors in auction rate securities into believing that the investments were cash-like and more liquid than they have turned out to be.

Now that these companies don't have access to the cash they thought wouldn't be a problem to get at, UBS is helping them out: by letting them use the ARS as collateral to borrow from the bank that got them into this mess: presumably, with interest.

Imagine you take your hard earned money and at the urging of your broker put it into an account that pays just a bit more than a typical money market fund. Your broker assures you that the account would offer a higher return and would offer liquidity at weekly auctions. Sounds good, no?

Now imagine that you wake up one morning and find that money frozen -- as in you thought you had easy access to your money and now you can't get a penny of it. As I posted last month, that's what happened to investors in Auction Rate Securities (ARS) -- a $330 billion market. Since that post, there have been 583 comments from people who have been affected by this mess.

One commenter, Dave Lehrian, needs to pay taxes on a business he sold. He moved the entire proceeds from selling his business from a bank account at Wells Fargo & Co. (NYSE: WFC) into an ARS. Now he still owes $350,000 in taxes on the sale but can't get his money out of the ARS account to pay them. I can only imagine the frustration he must feel. Here, in his own words, is his story:

As I posted last week, Auction rate securities (ARSs) is a $330 billion market for long-term bonds that are supposed to pay lower rates because their interest rates are set through auctions. Municipalities who issued ARSs are suffering because 1,000 of these auctions failed and instead of paying 3% interest rates, they have to pay 20%. And if that wasn't bad enough, the investment banks that oversee these auctions are refusing to let investors withdraw their money.

DealBreaker explains that the demand for ARSs dried up sometime last year, and evaporated completely in 2008. This shift was driven by a March 2007 decision by the Financial Accounting Standards Board (FASB) that the heading "cash equivalents" should be eliminated from balance sheets and cash-flow statements. The FASB recommended that cash-flow statements should present only flow related to cash. Items currently classified as cash equivalents would be classified in the same way as other short-term investments.

Corporations responded to this by moving out of the ARSs so that their balance sheet cash positions would not be reduced as a result of the FASB decision. This meant that many corporations no longer wanted to buy ARSs. As corporate demand for ARSs vanished, banks had to keep more ARS inventory onto their own books. Since banks need to maintain a constant ratio of capital to assets, they needed to increase their capital commitment at the same time the banks faced challenges from other parts of the credit markets -- such as Collateralized Debt Obligations (CDOs). Last week they decided against committing additional capital to supporting the auction, and let them fail.

It seems as though every week, the public is forced to learn another one of Wall Street's strange names for a surefire deal that couldn't miss. But the reason we're learning about those strange names is because -- contrary to promises -- the can't miss deals are shutting down -- taking Wall Street's credibility down along with them.

The latest of these is auction rate securities (ARSs) -- a $330 billion market for long-term bonds that are supposed to pay lower rates because their interest rates are set through auctions. The New York Times reports that municipalities who issued ARSs are suffering because 1,000 of these auctions failed and instead of paying 3% interest rates, they have to pay 20%. And if that wasn't bad enough, the investment banks that oversee these auctions are refusing to let investors withdraw their money.

Which investment banks are imposing this pain? Goldman Sachs Group (NYSE: GS), Merrill Lynch (NYSE: MER), and Lehman Brothers Holdings (NYSE: LEH) and the problem with ARSs is not limited to municipalities entities such as the Port Authority of New York and New Jersey. Closed-end mutual funds, student loan companies and corporations also issue them.