Auction Rate Securities: How One Investor Got Out

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Fred Wilson tells the story of how he got out of the auction rate securities he bought almost a year ago: he was fortunate to hold securities with high penalty rates.
"When risk is appropriately priced, there is a market for something. And in the case of auction rates, the risk is illiquidity and so you must focus on the penalty rates," he writes.
We still haven't been able to get a satisfactory explanation as to us why some auction rate securities were issued with very low penalty rates. Doesn't this undermine the market clearing function that was supposed to guarantee their liquidity? The brokers we asked about this gave a clear and unsatisfying answer: since the auctions hadn't failed for decades, people just stopped paying attention to the penalty rates.

Our Run-In With Auction Rate Securities - And What It Taught Me About Markets
[Seeking Alpha]

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