Wall Street’s Attempt to Fix The Auction-Rate Market
Auction-rate securities have officially joined the same club whose members include “subprime†and “SIVs,†among others.
Since February, the $330 billion auction-rate securities market has been in a state of collapse, following one failed auction after another because there were no bidders to buy the securities.
It appears help may now be on the way for individual investors and small businesses. On April 1, the Financial Industry Regulatory Authority (FINRA) released guidelines to help investors address cash-flow concerns. Among the suggestions: Investors could sell the securities to other secondary markets or borrow against the value of the holdings from their brokerage firms.
The caveat to this is the tax consequences that investors could face when taking out margin loans. Moreover, it is possible - make that very possible when considering how the auction-rate securities market got to its current state in the first place - the brokerage firms could sell an investor’s securities to meet a margin call without informing them beforehand.
In other auction-rate securities news, UBS AG announced plans last week to mark down the values of auction securities on its customers’ brokerage statements. Reportedly, the mark downs will be anywhere from a few percentage points to more than 20 percent.
News of UBS’ decision, which is the first confirmation that auction-rate securities have, in fact, beaten down investors’principal holdings, caused a stir with some issuers of the bonds. Some municipalities that were facing higher penalty interest rates from failed auctions are now refinancing or placing bids in their own auctions.
Whether the recent help from Wall Street makes any real difference to the thousands of auction-rate securities investors who are unable to withdraw their money from frozen accounts is yet to be seen. It could be a situation of too little, too late.Â
Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.
