So how did Wall Street convince all those corporate treasurers to invest the cash holdings of their companies in disastrous auction rate securities? A new study shows that more than 85 percent thought that Wall Street firms would bail out the market if it failed, according to this morning's Financial Times.
Nearly 70 per cent of corporate treasurers who bought auction-rate securities said dealer support was implied. A full 17 per cent of the treasurers said that they were "told explicitly that the investment bank would ensure that the auctions would not fail."
For years, the firms selling auction rate securities did support the market by buying excess securities, guaranteeing the auctions would not fail. When scrambling to increase balance sheet capital earlier this year, nearly every firm on Wall Street that had sold the products decided to let the auctions fail. Since then issuers have been forced to bail out those securities paying the highest interest rates, while investors with those paying the lowest interest rates have simply been unable to access their funds.
Auction-rate securities 'implied support' [Financial Times]
Posted by guest , Jun 30, 2008 9:39AM
You want a guarantee, buy treasuries.
Posted by guest , Jun 30, 2008 9:41AM
"Wall Wall"???
Posted by Anal_yst , Jun 30, 2008 9:45AM
Like 'Wall to Wall' by chris brown?
But yea, lawsuits are coming, as myself and others have been saying. All the disclosures and fine print in the world can't save you when the broker explicitely says (follow the emails!) they're totally liquid yadda yadda...
Posted by guest , Jul 02, 2008 4:06PM
This was also the story with the SIVs btw...which is why so many of them are on balance sheet again.
Posted by Alejandro Rogers Bozzolo , Jul 10, 2008 1:44PM
Most of these Auction Rate Securities were AAA rating and tax exempt and thus liquid at that moment.
I mean, even the Treasury bond market could theoretically dry up if no one is willing to trade bonds anymore. If that happens you would be stuck with your 10 year bond and it would become pretty illiquid!
But it is widely accepted that T-Bonds are like cash instrument, and they are sold that way. Does that make the broker a liar?