Auction Failure: Goodbye ARS Market?

posted by guest

Feb 16, 2008 5:20PM

I am an individual investor who was sold these instruments as cash equivalents by citi-smith barney. In fact the account was linked to my checking account. I am virtually 100% invested in these securities which went from "cash" to 30 year paper overnight and with no warning. In fact on Monday 2/11/08 I moved a large amout of cash to these ARS securities without the financial advisor even telling me that not only had demand decreased but that Citi was no longer going to provide liquidity to the market. They allowed me to purchase this product still listing it as a cash equivalent all the while knowing that in a very short time I as their retail customer was going to be holding 30yr. paper which I now cannot liquidate. Much of my children's college money is tied up here. This is beyond outrageous. Anyone in a similar position please post contact information if you are not to embarassed to do so. These firms must be held accountable.

posted by guest

Feb 16, 2008 5:21PM

I am an individual investor who was sold these instruments as cash equivalents by citi-smith barney. In fact the account was linked to my checking account. I am virtually 100% invested in these securities which went from "cash" to 30 year paper overnight and with no warning. In fact on Monday 2/11/08 I moved a large amout of cash to these ARS securities without the financial advisor even telling me that not only had demand decreased but that Citi was no longer going to provide liquidity to the market. They allowed me to purchase this product still listing it as a cash equivalent all the while knowing that in a very short time I as their retail customer was going to be holding 30yr. paper which I now cannot liquidate. Much of my children's college money is tied up here. This is beyond outrageous. Anyone in a similar position please post contact information if you are not to embarassed to do so. These firms must be held accountable.

posted by guest

Feb 16, 2008 6:00PM

I also have been"stuck" with these ARS.
Has anyone mentioned or discussed a class action suit against the banks for withholding info from the investor.
I'm told that lack of licquidity doesn't constitute loss or damage but
we need legal assistance on this mess

posted by guest

Feb 17, 2008 5:08PM

I understand everyone's frustration about the ARS situation. But it is a little early to worry about hiring a lawyer, since the situation will probably be resolved on its own, before your lawyer can do anything. Closed-end muni ARS are yielding the same thing as 5 year muni bonds and auction rate bonds are yielding even more. The issuers don't like paying these yields and the only way to lower their borrowing costs is to redeem them or find some way to restore an orderly mkt. In the meantime enjoy the above market yield!

posted by guest

Feb 18, 2008 12:36PM

5:08

I disagree. Perhaps you are correct in the instance of close end funds. But I also hold ARS muni bond instruments. The so called "penalty rate" is not much of a kicker (nothing like the 20 percent gain on the Port Authority bonds). For this reason I am very concerned about this.

I also agree with 5:21 that the other significant issue here is LACK of DISCLOSURE. The fact is the FA's never sent disclosures about the fact that these really weren't cash investments. I finally got a copy of the disclosure AFTER the market fell apart. Frankly given all of the turmoil in the credit markets, had I actually seen the disclosure, I would have insisted on much of this being in cash.

I am in a similar situation as 5:21. As much as I would like to blame Citi, apparently the problem was widespread with all of the FAs. They might create a secondary market, but then you will likely be shaving off 5-10% of your asset value to get the liquidity.

I am equally pissed about this. It would be one thing if the FA's sent the required disclosures and let you know that it is, in fact, not insured and not cash. I am very certain that this wasn't done across the board.

Now wait till March 15th and April 15th when corporate and quarterly tax returns are due. The damamges and exposure to the banks are going to become *very real* at this point.

And for those that argue that this wasn't forseeable. Take a look at the attached article in CFO magazine. The date is 2005!!! This would be Exhibit 1 in my arbitration complaint.

http://www.cfo.com/article.cfm/3905502/1?f=archives

posted by guest

Feb 19, 2008 2:52AM

@5:08:

Your contention that a secondary market results in 5-10% liquidity haircuts is alarmist speculation.

Second, you come across as a complete ass with your "exhibit." That information was obviously available while you were investing in ARS. Why didn't you take 5 minutes to diligence and understand what you were investing in as opposed to Monday morning quarterbacking this ARS market trouble (a market that has functioned so well for more than two decades that no secondary market exists)?

You probably spent more time researching your most recent vacation, HDTV, or car purchase, than you did on how you invested your "cash" into something that clearly isn't "cash." I'm just curious how you were bamboozled into investing in the ARS market in the first place?

I'll bet it had something to do with the fact that the paper was AAA, insured, generally liquid--although at a minimum only weekly during the scheduled AUCTION (that didn't raise ANY questions?), but mostly because it paid more than money market. Which, btw, the ARS are still above money market rates, and in many cases well above.

News flash, money market funds aren't guaranteed to maintain a $1 NAV. So, if you have any money in one of those, you might want to read a prospectus. You know, just in case something happens there.

Finally, unless your account was managed on a discretionary basis, you bear a fair amount of responsibility for how YOU invest YOUR money. Take this ARS dislocation as the best, least painful investment lesson you can learn--understand the risks you're taking on. But I guess that would require you to take responsibility for your investment decisions...

posted by guest

Feb 19, 2008 9:19AM

2:52

You make some reasonable points, but your sour tone undermines them severely. I suspect you are an FA with some very unhappy clients. After speaking with several of them lately, I hear a sense of anger which barely conceals there underlying sense of panic. You can blame clients, but at the end of the day, clients are going to be holding you accountable - especially where you didn't at least educate them about the risks.

Let me be more clear about the facts surrounding MY situation.

1. My FA *NEVER* sent me the ARS disclosure. She took the time to do that on Wednesday in a blast email to all of her clients. The email was something to the effect of "Here is some info that I thought you might find interesting. Call me with any questions." At the same time, she was executing SELL orders on all of the ARS (without telling me about that) but all of the auctions failed.

2. The money was simply represented to me as being in CASH. Had I known it was not in CASH I would have obviously researched this. Your assumptions are incorrect.

3. Had I gotten a disclosure, you can bet your sorry ass that I would have researched this and found the CFO article and probably kept more money liquid. The fact that the FA executed SELL orders without telling me - and sent the disclosure without ANY explanation is further evidence that she knew WHAT I DIDN'T. The $ were not liquid, even though it had been represented as such.

4. Your attitude confirms my greatest fear - that most people that work in this industry (FAs in particular) are not any more sophisticated than used car salesmen or real estate agents.

posted by guest

Feb 19, 2008 2:18PM

I'm an individual investor, with Smith Barney, who holds a fair amount of now failed ARS'. I really don't understand the real reason for the auction failures. Can anyone clarify this for me ?

posted by guest

Feb 19, 2008 3:04PM

This should help. FAs might find this of particular interest when the free up from calls with clients and lawyers.

http://www.reuters.com/article/Manufacturing08/idUSN1925358920080219

posted by guest

Feb 19, 2008 5:43PM

These two posts might help as well:

http://zamansky.blogspot.com/2008/02/auction-rate-securities-investor.html

http://zamansky.blogspot.com/2008/02/auction-rate-securities-scandal-made.html

posted by guest

Feb 19, 2008 8:56PM

I am glad that people are talking lawsuits since it will get the brokerage firms moving on a resolution to this. But it WILL be resolved. AA and AAA issuers don’t want to pay 10%, closed-end funds can’t buy bonds at 3 ½% and then pay preferred holders 3.30% for very long. FAs are furious and so are their clients. Since there is no real credit quality issue and, now with the threat of mass lawsuits, it is everyone’s interest to fix this problem, it should be resolved quickly.

posted by guest

Feb 19, 2008 9:08PM

8:56

I think you are right on about this. FA's and firms very concerned about legal exposure and March/April tax deadlines. Issuers are very unhappy about payments. Closed-end funds seemed to be in the tightest jam (and I am not sure how they get out of this). Clients actually seem to be the most understanding (especially if they are getting a nice penalty yield). Personally I am getting a pay out that is almost 12 percent. Unfortunately this *mistake* might turn out to be my best performing investment all year. Not so true for others. Indeed, if you need liquidity this is nothing short of a disaster. I have also heard that banks are willing to issue loans if you need liquidity. Obviously they and the FAs are running scared.

posted by guest

Feb 21, 2008 8:36AM

I always find it funny when banks, brokers etc all tell their customers NOT to get a lawyer involved and "these things get resolved", while the banks/brokers etc all go running to lawyers when there is a cloud in the sky.

Its funny, really it is.

If you're stuck in this mess, go get a lawyer and sue their asses. Whats the big deal? Would your bank let you walk away from something if you told them," Dont worry, I'm working on it, it'll get resolved?"

posted by guest

Feb 21, 2008 4:14PM

To 5:08. "Alarmist speculation" perhaps not. My FA told me that a secondary market opened today. Offers were 85 cents on the dollar. You are obviously quite informed about investing and congratulations on that. "Shame" on all of us who actually relied on the representations that these instruments were cash equivalents without reading the fine print. Genuine shame on the institutions who continued to lead us to buy these instruments knowing that they no longer had any intention of allowing the auctions to succeed. As for your prognotications regarding the haircuts on the ARS' well maybe you should reevaluate Carnac.

posted by guest

Feb 21, 2008 7:28PM

My situation is good news bad news.

Some of my ARS are earning me a sweet penalty rate of about 12 percent. Not sure how long that will last - but it's probably the best performing asset in my portfolio. Imagine the bonds will get called in a matter of weeks or months.

The bad news is another set of ARS in some close end funds are only earning 3.5 percent. I hear similar stories about the penalty rates in these close end funds. Not good. Because of the lower penalty rate I don't know if/how that money will ever become liquid. If interest rates rise - forget it!

If anyone has any idea on how the close end funds will get liquidity on this type of security, I am all ears.

posted by guest

Feb 25, 2008 10:54AM

I'm in a situation similar to some of you guys in that I have some ARS from closed end funds. I asked my FA of all potential risks even if the AAA was really that or some a wrapper like those of crappy subprime CDOs. It was never disclosed to me as long term debt shamming as short term, or that auctions were involved, or about penalty rates etc.. I tried to investigate all risks but liquidity risk was never brought up. Just told it was like a money market or short term cd. All we want is full disclosure and educate us of any risks. If after that something happens most of us can live with the consequences.

For right now I don't need the money but if it doesn't resolve itself in time I'll be looking to join some sort of lawsuit as well. It's essentially marketing fraud.

Every closed end ARS has their own index it's tied to for determining the penalty rate, so rate increases in the future may actually help some of these ARS. Because then the index it's tied to will also go up and along with it the coupled penalty rate.

posted by guest

Feb 25, 2008 8:09PM

Odd result for me today. I wasn't trying to sell my ARS since I am getting what basically amounts to a 13 percent interest rate. That said, the auction failed. It's a crazy result when you think about it. No one is willing to buy an instrument that is backed by a Muni AAA instrument that pays 13 percent. This seems like an incredible buying opportunity if you have the cash.

posted by guest

Feb 26, 2008 11:01AM

Closed End Funds set their penalty rate based on an index, so if rates rise, so should the rate they pay investors. If they want to restore liquidity, they may need to change the formula this rate is based on to give yields a boost.

posted by guest

Feb 26, 2008 8:01PM

The prospectus for the ARS securities are an average of 200 to 400 pages. I wonder how many of you read this in full before investing rather than relying only on what an FA told you. I think that the failed ARS's cannot stay at their current maximum rates for long. The issuers will need to either call them back or long term institutional buyers will pick them up. When the auctions start going off as they should, good luck finding these kinds of rates in other so called "cash" instruments. Enjoy your rates while you can.

posted by guest

Feb 27, 2008 11:00AM

Dear 8:01

I actually *never* got a perspectus until the wednesday of the week that the auctions were failing. Moreover when your FA is telling you that it's a cash equivilent, why would you really be inclined to read one - assuming you even got one in the first place.

I agree the rates are good money if you can get it and don't need the cash. That said, thousands of FA's are freaking out because their clients are *PISSED* they can't get access to what they thought was a reasonably liquid asset.

Even if you don't get your ass sued, it doesn't mean you won't get fired by all of your clients.

posted by guest

Feb 28, 2008 11:30PM

I actually have the reverse problem. My FA sold off my Auction rates without my authorization. I needed the income. It was AAA taxable paper paying in the mid 4%. Now I have to take a 2% haircut on my income by putting it in a money market that is yielding 1.8%. I would have been willing to ride out this temporary illiquidity to keep the income. Oh well.

posted by guest

Feb 29, 2008 6:59PM

Hey guest@11:30pm - I've got a bunch of units I will gladly sell you. How many units $25k/unit do you want?

posted by guest

Feb 29, 2008 9:59PM

This is going to be a long battle. If you are lucky enough to have shares with a fail rate which is high, (ARS) you will probably get out because someone will assume the risk for the return. If your shares are in a closed end fund (ARPS)and the fail rate is 4 - 4.5% then you're stuck. No one will take the risk for 1.5 x's the present low interest rates.
I can guarantee you one thing. I was told these shares came out every 7 days and the money was available same as cash. This is true from everyone I have heard from. I think the firms know they are in trouble. The way my broker is acting it appears he is hoping that I just go away.
--More later.

posted by guest

Mar 02, 2008 12:58AM

What should happen is this, CEF's need to deleverage or refinance with long term paper.

They have a moral and legal obligation to the those that were mislead on their behalf into thinking they had a reasonably liquid investment, while loaning THEM money.

The fact of the matter is, the money is THERE. It was not lost or defaulted on. This may have to take place over time. so as not to further disrupt the market.

An agreement to do this would not only placate the many aggrieved investors, but would put a floor on the value of these ARPS in the secondary market, since they would then have a maximum call date and not go on for the next 500 years.

I say all ARPS investors should attend the annual meetings as they come up and demand this action.

posted by guest

Mar 02, 2008 8:31PM

12:08

You are ABSOLUTELY right about this. Good idea on attending annual meeting. See today's (Monday) WSJ for a very good story on the turmoil. Note the "money shot" quote at the end from Blackrock. Short those MoFos.

----wsj clip---

Some firms, such as Morgan Stanley, also are doing so-called swaps for select clients with multimillion-dollar positions. Basically, clients who don't need immediate liquidity are swapping their low-yielding cash-like holdings for higher-yielding auction-rate securities. That allows the original holders of the auction-rate securities to exit their positions without taking a loss. It is occurring on a case-by-case basis for the very wealthy and isn't regarded as a mass solution.

In addition, Wall Street brokerage firms are also actively looking at creating a secondary market, which will allow investors to sell their auction-rate securities to other investors. The catch: Investors participating most likely would have to sell securities at a discount.

For investors who don't need the money right away, there is an upside -- higher yields. Many auction-rate securities are required to pay higher interest rates if an auction fails. Rates typically reset higher with every failed auction.

However, investors who bought auction-rate preferred securities issued by closed-end funds are among the worst off because they are only getting 0.20 to 0.30 of a point higher interest than what they would normally get without auction failures. That provides little incentive for the funds to cash out investors.

Some firms are starting to prepare preferred investors to be stuck for a while. BlackRock Inc. says on its Web site that "clearing auctions may not occur for a long time, if ever"

posted by guest

Mar 03, 2008 10:45AM

Question for Guest on 2/28 at 11:30p.
My F/A is telling me that all the auctions for ARS are still failing.
What date did you sell yours and who was your broker?

posted by guest

Mar 04, 2008 11:04AM

It is obvious that the auctions will never come back. But that doesn’t mean there will be no liquidity. The issuers will just refi with another type of security or redeem. They can’t pay penalty rates forever. Some of the tax-free CEFs are over 4% now. Anyone who thinks that they will be stuck in ARS forever is way off base.

posted by shivelys

Mar 07, 2008 12:41AM

My parents are in invested in Auction Rate Preferred Securities. They can't withdraw from their investment either. They actually tried to withdraw from their investment right before it got frozen, but their FA talked them out of it, and told them that their investment was safe. They also got deterred from withdrawing because the FA lied to them and told them that they didn't have an authorization form saying that they could transfers their funds via wire transfer, which is how they wanted to transfer the funds. My mom has a copy of the signed form, so she told the FA this, and then the FA said that the form expired after a year, but it doesn't state this anywhere in the form. Anyone have an opinion on whether my parents could sue? Also, what do you think the likeliness of them being able to get their money out is? They unfortunately have most of their retirement in the ARPS. If anyone is interested in buying these, please contact me (they are through UBS..12 sets of 25,000)! sshively5@yahoo.com

posted by Harmon

Mar 10, 2008 2:36PM

I am also an investor who was misled by my FA (Merril Lynch). Like many people, I am outraged that what was supposed to be an ultra safe investment could have been so egregiously misrepresented.

What if all victims got together and split the cost of a full page NY Times ad, letting the public know how these brokers/funds screwed so many individuals while listing all the offenders???

Public pressure needs to continue to mount if anything is to be done to restore our liquidity!

posted by guest

Mar 10, 2008 11:33PM

All: we need to consolidate all ARS investors onto one website. Until we get our own web page, may I suggest you check in or at least monitor bloggingstocks.com. There are some good discussions going on and good cross sharing of ideas. With a unified critical mass, we can be much more effective in getting this mess resolved.

http://www.bloggingstocks.com/2008/02/27/when-the-collapsed-auction-rate-securities-ars-market-gets-per/1#comments

posted by guest

Mar 11, 2008 3:12PM

For those looking for a place to sell your auction rate securities, I encourage you to visit the Restricted Securities Trading Network (RSTN) at www.RestrictedSecurities.net. The RSTN is the largest centralized secondary market for ARS. The firm I work for, Restricted Stock Partners, manages the RSTN. Alternatively, please feel free to call me directly at 212.668.3909 or via email at boconnor@restrictedstock.com with any questions. Regards, Brendan O’Connor

posted by lisaswanson

Mar 11, 2008 10:45PM

I'm moving over from a neighboring blog. I suggest that most of you ignore the above solicitation from "RSTN," which at last count was paying people stuck in Auction Rate Preferreds about 73 cents on the dollar.
As mentioned above, consolidating the blogs is a good idea. There is tremendous insight and energy on

www.bloggingstocks.com/2008/02/27/when-the-collapsed-auction-rate-securities-ars-market-gets-per/1#comments

I am all for taking out an ad, or writing an editorial letter signed by thousands of victims, alerting the public about the fraud committed by the brokerages and funds. I would be happy to contribute and to spearhead. Please do log in to the above blog and let's get it going.

posted by guest

Mar 12, 2008 11:02AM

Lisa - I am sorry that you feel that way. The RSTN is an open, free marketplace to join where holders can receive bids from over 500 participants. We do not set prices, the bidders do. We are getting more and more buyers in every day, so have a little patience as this is a new market and spreads will certainly tighten as it matures. Call me if you want to discuss further, 212.668.3909.

posted by lisaswanson

Mar 12, 2008 8:11PM

Thanks, but I already talked to RSTN quite a while ago. I have all your info, and I know exactly what it's about.

posted by guest

Mar 12, 2008 11:51PM

lol, don't mess with Lisa, she's no dummy.

Spreads probably will tighten, but not because of more bidders, but as more funds , like Nuveen just did, announce FULL CASHOUTS, the panic will subside.

Let's hope it's soner rather than later.

posted by guest

Apr 05, 2008 7:46PM

I am a foreigner and part of those misled by UBS.
$400K (45% of my total) ERA invested "temporarly safely" as suggested by My FA are, now, surely frozen for longtime ...
At 73 cents /dollars I am ready to sale now, instead of waiting. Do you believe that news could be good from Ambac or UBS with billions of additional losses and many class action suits.
If it is still time and if RSTN or RSP give me an opportunity to get out of this nightmare, I will take it... 4-5-08

posted by guest

Apr 18, 2008 6:38PM

Amazing, I was proactively courted to take my cash into these New Jersey Turnpike Muni bonds and now I am stuck with a half million $ of 2030 paper with no idea when the bond auctions are going to resume. I had not idea that these "cash" instruments which the FA told me will yield handsome Tax free yields are stuck. I had them in cash till the FA called me. Amazingly I did not recieve a single call from the FA about this probem. Any ideas when the bond auctions will resume so that I can get this money back for other investments? Is there a class action suit I can participate in? SmithBarney was my FA

posted by guest

May 23, 2008 7:23PM

Does anyone know how a holder of these notes may purchase them at less than par? Are they able to do this because they were structured a particular way as in an SPV? Thanks in advance.

posted by guest

May 23, 2008 7:24PM

Oops. It's 7:23 again. What I meant to ask is - how can an Issuer buy back these notes at a price that is sub par. Thanks.