Two years after the $330 billion auction-rate-securities market became frozen, thousands of individual and institutional investors are still waiting for answers. Some investors have been lucky. This summer, UBS AG - one of the biggest retail ARS sellers - was ordered via an arbitration decision to pay $81 million to Kajeet Inc., a Maryland firm. The ruling was 10 times the amount that Kajeet had originally invested in auction-rate securities.
Before the ARS market crashed in February 2008, auction-rate securities were issued by cities, hospitals, school districts, and others as long-term debt instruments and resold with new interest rates at periodic auctions. Many individual and institutional investors bought the securities because the products were touted by financial advisors as safe alternatives to cash.
Everything changed in 2008, however, when the Wall Street banks that had previously supported auctions for ARS products pulled out entirely. As a result, the market froze, and investors with supposedly cash-like investments were unable to access their cash.
Since then, a number of investment firms and big banks have repurchased billions of dollars of auction-rate securities from investors in order to avoid charges from state and federal regulators. Many investors, however, have been left out of such agreements. As reported Oct. 30 by the Wall Street Journal, some cases include investors who bought securities at one firm and then moved their accounts. Moreover, some brokerages that sold auction-rate securities but didn’t create them have yet to settle with clients.
In the meantime, investors who bought their auction-rate investments through a broker/dealer governed by the Financial Industry Regulatory Authority (FINRA) are filing arbitration claims in hopes of recovering their losses. Other investors are turning to the secondary market, where the securities generally sell for between 70 cents and 90 cents on the dollar. The amount depends on the issuer and how long the securities are expected to remain outstanding, according to the Wall Street Journal article.
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