The Auction Failure: Wall Street Execs Feel The Pain

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Yesterday we pointed out that the freeze-up in auction-rate securities could lower demand for equities as many individual investors found their investment assets essentially locked into these suddenly illiquid bonds. But it's not just the clients of brokerages who are facing a cash squeeze—the brokers and executives at investment banks are facing the squeeze as well
After the major accounting firms ruled that auction-rate securities were not cash-equivalents, many corporate investors began to reduce the use of these instruments for cash management purposes. But executives at banks such as Citi, Merrill Lynch and Goldman Sachs continued to use the auction-rate securities. For many, the extra two-dozen or so basis points they could earn by holding the securities rather than a true cash-equivalent made them irresistible. For the men and women who manage money and put together complex financial transactions for a living, achieving maximum returns in every part of their portfolio is often a point of pride.
Now that many of the auctions have begun to fail, they find themselves without access to their assets. Ironically, this pain for the professionals may wind up helping their clients. If the auction failures continue, executives on Wall Street may pressure the banks to take action to revive the market. It's one thing if the clients cannot buy fuel for their yachts. It's quite another if the broker cannot.

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