Citigroup’s Sale Of Auction-Rate Securities Puts Hawaii In A Bind
Like many states, Hawaii has been hit hard from investments in auction-rate securities. Two years after the market for the instruments collapsed, Hawaii has lost about $250 million in market value on $1 billion in student-loan securities initially sold by a single Citigroup broker as a “cash substitute.” The story was first reported March 4 by Bloomberg.
Hawaii can’t find a buyer for the securities, half of which were purchased eight months before the ARS market crashed from Honolulu broker Pete Thompson.
According to the Bloomberg story, the deal transpired while Citigroup was increasing brokerage commissions and traders were being told to “make sure all hands are on deck” and to “do whatever is necessary” to dispose of auction-rate bonds as signs of the market’s demise began to appear.
Auction-rate securities have been the root of financial problems for hundreds of thousands of individual and institutional investors for more than two years. The nightmare began in February 2008 when the $330 billion ARS market came to a standstill after the Wall Street banks that underwrote the securities abruptly pulled back their support.
Meanwhile, purchasers like Hawaii - which were under the impression that auction-rate securities equaled a cash substitute - have been left with few options. They could sell the instruments but only at a considerable loss.
According to Bloomberg, an end-of-the year valuation from Citigroup showed that securities with a face value of $1 billion were worth about $752 million.
“It was represented to us that these were liquid investments that we could get out every seven to 10 days,” said Scott Kami, an administrator at Hawaii’s Finance Department, in the Bloomberg story.
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