Wall Street Firms Abandon Auction Rate Securities Leaving Investors Holding The Bag
Investors who purchased short-term investments known as auction-rate securities through Wall Street firms are facing a financial shipwreck. The securities, many of which have turned into long term risky investments, were dubbed as “safe” and represented as cash equivalents. Until recently, auction-rate securities could be sold weekly or monthly at auctions sponsored by large Wall Street firms; however, the success of these auctions was largely dependent on the support of the very Wall Street firms that sold the auction-rate securities to begin with. As the subprime crisis evolved, the Wall Street firms stopped committing money to make sure the auctions ran smoothly. The result has been chaos and uncertainty in the auction-rate securities markets.
Of course, the primary problem that investors are encountering is that auctions are failing leaving their investments effectively frozen Investors cannot sell their securities in the manner which they expected to be available. They are being forced to hold on to these securities unless they are able to sell them in the secondary market perhaps at a substantial discount to face value. Moreover, there are significant doubts about whether the auction-rate securities markets will ever return to normalcy. If they do not, investors face the prospect of holding auction-rate securities for years unless they resort to the secondary markets.
The second major problen facing investors is “what are these securities really worth?” UBS and Goldman Sachs have decided to mark down the value of their clients’ auction-rate securities. These markdowns are based on internal models which are used to estimate price. Markdowns vary between three and thirty percent. Other firms such as Merrill Lynch, Citigroup Inc. and Morgan Stanley have opted not to mark down customer portfolios even though many firms are marking down auction-rate securities in their own portfolios. Unfortunately for investors this is all guesswork. Investors can’t sell the securities for the prices reported. In fact, investors who decide to sell in the secondary markets may be forced to discount the prices reported by their brokerage firm by 15% to 50% or even more to effect sales.
While Wall Street continues to report that it is grappling for a solution to the auction- rate securities challenge, investor anxiety builds. Under the circumstances, it appears that investor anxiety is well founded. The simple truth is that auction-rate securities are worth what an investor can sell them for. This simple premise suggests that many investors are facing huge losses.
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 representing individual and institutional investors regarding their auction-rate securities problems. For further information, please contact us.
