Why did the market for auction-rate securities collapse so violently earlier this year? Shortly after the auctions seized up we published a “primer” on what had happened, explaining that changes in the way corporations account for the securities. With corporate demand gone, banks found themselves having to soak up more and more inventory. The capital commitment required to do this grew at the same time the banks faced challenges from other parts of the credit markets, and eventually the banks decided to let the auctions fail.
This view is echoed in a new article in Compliance Week, a weekly newsletter on corporate compliance and risk management. Most of the article is devoted to a discussion about how financial officers should value auction-rate securities. (Short answer: It’s complicated!) But there is also a good discussion why the auctions failed. And by “good” we mean: “totally agrees with us.”
Espen Robak, president of Pluris Valuation Advisers, says the jitters over credit markets aren’t entirely to blame for the ARS freeze. Guidance from the Securities and Exchange Commission and from Big 4 audit firms told investors they couldn’t view ARS as equivalent to cash, so they became less popular as a cash management vehicle for corporate treasuries, he says. That contributed to the sell-off and dwindling number of buyers.
Robak says companies went on a selling spree in the latter half of 2007, shedding some $70 billion in ARS: “That’s an awful lot of paper to change hands in such a short period of time.”
Cos. Face Auction Rate Insecurities [Compliance Week]
Posted by guest , May 14, 2008 1:22PM
The auctions failed because Chuck Norris let them fail.
Posted by Anal_yst , May 14, 2008 1:31PM
Can we get an update on the class action suits? I'm sure the lawyers are having a friggin field day with this.
Posted by guest , May 14, 2008 2:04PM
I'd wager Silbert's "secondary market" amounts to a pool he raised to take advantage of freaked out treasury departments.
25% discount on an issue with insured underlying?
Even if you assume all the monolines fail and that insurance is no good, the government essentially backstopped the Student Loan market already and are trying to backstop the mortgage market (if Barney Frank has his way).
I wish I had the scratch to take a meaningful amount of this paper. Ah well, I'm gonna go cruise the hedge fund jobs board again :)
Posted by dd , May 14, 2008 7:02PM
Carney, you read Compliance Week? Really?!? Sounds super exciting.
Posted by guest , May 14, 2008 7:51PM
the auctions failed because corrupt institutions had finally divested most of their own ARS inventory on their unsuspecting clients . . . and if you believe anything else, ask santa or the easter bunny
Posted by guest , May 14, 2008 7:53PM
the auctions failed because corrupt institutions finally passed virtually all of their own ARS holdings on to their unsuspecting clients . . . that's why . . . and if you believe anything else, maybe santa or the easter bunny can help you!
Posted by guest , May 14, 2008 8:18PM
the auctions failed because corrupt institutions had finally divested most of their own ARS inventory on their unsuspecting clients . . . and if you believe anything else, ask santa or the easter bunny
Posted by guest , May 14, 2008 8:18PM
the auctions failed because corrupt institutions finally passed virtually all of their own ARS holdings on to their unsuspecting clients . . . that's why . . . and if you believe anything else, maybe santa or the easter bunny can help you!