Citibank: Auction Rate Securities Market Will "Cease To Exist"
Citigroup, the largest underwriter of municipal auction-rate securities in 2006, said today that the $330 billion auction-rate securities market, will “cease to exist,” according to Martin Z. Braun of Bloomberg.com. If this happens, the repercussions among investors, municipalities, closed end mutual funds and investment banks will be unprecedented. The market for auction-rate securities collapsed in February after Wall Street firms stopped using their own capital to prevent auction failures.
While the disappearance of this market will only reduce brokers’ earnings by 1 to 2 percent, investor anger over their inability to access their holdings will be significant. Most investors bought auction rate securities based on their brokers’ representations that they were safe liquid investments suitable for short term holding of cash.
Auction-rate bonds allowed issuers such as municipalities, hospitals and closed end mutual fund to issue debt maturing in as long as 40 years at short-term rates that reset every 7, 28, or 35 days through an auction. Investors began abandoning the auction–rate market in February 2008 when the stability and credit worthiness of bond insurers was called into question.
Thousands of auctions began failing when investment banks who had stepped in when there were insufficient bidders pulled back as they took $245 billion in credit losses and writedowns. Investor were no longer able to turn the securities into cash and some issuers had to pay penalty interest rates as high as 20 percent. According to Citigroup, “the liquidity providers were unwilling to provide liquidity.”
Brokerage firm clients that hold approximately $100 billion to $150 billion of auction rate securities control more than $750 billion in assets. In order to appease customer anger, some firms are letting customers borrow against their illiquid auction-rate bonds. UBS has announced that it will allow customers to borrow the full value of their auction-rate debt. In the meantime, various municipalities and non-profit organizations are refinancing their auction rate debt in order to lower the large default penalty payments they have been forced to incur when their auctions failed. Similarly, Nuveen Investments and seven other fund managers said that they will redeem $7.7 billion in taxable preferred auction-rate shares. Unfortunately, these developments still leave a lot of investors that hold auction rate securities “out in the cold.”
Page Perry, LLC is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 30 occasions. Page Perry’s attorneys are actively involved in counseling institutional and individual investors regarding their auction-rate securities investment problems. For further information, please contact us.
