Auction Rate Securities:"Liquid Assets" That You Can't Sell
In her March 30 “Fair Game” column in the New York Times Business Section, veteran reporter and columnist Gretchen Morgenson reviewed the latest developments in the plight of thousands of individual investors stuck with auction-rate securities that their brokers had told them were “as good as cash.”
As we now know, auction-rate securities are debt obligations of an issuer – usually a municipality, non-profit or closed end mutual fund – whose interest rates are set at regular auctions, typically held every seven to thirty five days. With the gridlock in $330 billion auction-rate securities market, investors cannot get out of these investments while the auctions continue to fail. They have limited choices: They can hope that the issuers of the auction-rate securities offer to buy them back, they can hope to sell them in the secondary market, they can hope the market unfreezes or they can sue the brokers who sold them the securities, often with a promise that they could be cashed in weekly.
Investors in auction rate securities issued by municipalities or non-profits are probably best positioned. Most such auction rate securities provide for much higher default rates when auctions fail. Accordingly, the issuers have strong incentives to seek refinancing to redeem their auction rate securities. Already various such issuers have announced their intent to refinance.
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