Auction rate securities continue to create financial havoc for many institutional investors, with businesses across the country fighting an uphill battle to recover billions of dollars that are still frozen in the instruments. As reported Jan. 2 by the Wall Street Journal, some 400 companies hold more than $20 billion of auction rate securities that can’t be sold or are sharply reduced in value.
As a result, those companies are pulling back their spending which, in turn, creates yet another drain in an already-depressed economy.
It was in February 2008 that the $330 billion market for auction rate securities met its demise. Investors were left without the liquidity they had been promised and, instead, faced a new reality altogether: To access their money, they could only sell their investments on the secondary market at a steep discount or hold onto the securities until they matured - a process that could take 20 years or more.
Since then, individual and institutional ARS investors accuse the investment firms and banks that sold them auction rate securities of misrepresenting the safety and liquidity of the products. The complaints eventually prompted a series of investigations by both state regulators and the Securities and Exchange Commission (SEC), which resulted in a number of settlements last year. Under the settlements, many of Wall Street’s major brokerage houses agreed to buy back auction rate securities from individual investors and small businesses. For the most part, however, larger institutional investors were left out of the buy-back deals.
One of those institutional investors is Abercrombie & Fitch. According to the WSJ article, the company has $230 million, or 33%, of its cash on hand tied up in the auction-rate securities it purchased from several banks, including UBS AG and Bank of America.
“If we had more cash, we’d be running different [business] models, with more stores and more inventory,” said Abercrombie & Fitch treasurer Everett Gallagher, in the WSJ story.
For other companies, lack of access to short-term cash means employee cutbacks. Nanophase, an Illinois business that provides molecular technology for floor coatings and sunscreens, has let go 12 of its 54 employees. The company says that auction-rate securities have tied up about half of its $8 million, money it needs for corporate expenses.
According to the Wall Street Journal, Nanophase survived 2009 in part by selling some of its auction-rate securities for 87 cents on the dollar.
Another ARS investor who is hurting is Bob Bridgeman. When Bridgeman sold a small New Jersey oil-change and car-wash business, he put his money into LandAmerica 1031 Exchange Services. The company enables small business owners to invest their cash tax-free. It turns out that LandAmerica invested its entire pool of about $200 million in auction rate securities. In November 2008, LandAmerica was forced to close its doors. On Sept. 9, 2009, it filed for bankruptcy reorganization, leaving investors like Bridgeman - who had more than $1 million in LandAmerica - with no access to their cash.
“It was a big portion of what I worked for my whole life,” Bridgeman, 60, said in the Wall Street Journal.
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