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The calamity in the auction-rate securities market has taken investors in the thousands down a path of financial demise.

For more than two decades, some of Wall Street’s major players have marketed auction-rate securities to investors as safe, cash-alternatives. The same players also wholeheartedly supported the auction-rate market, committing their own money to ensure auctions operated as planned.

Then the subprime crisis entered the picture, and banks and brokers made a hasty exit from the auction-rate securities market. Firms that once stepped in to prevent auctions from failing began pulling back their support, leaving investors stranded with securities no one wanted.

When the banks and brokers were taken to task on who actually held the unwanted securities, the answer was “wealthy individuals.”

As it turns out, wealth is relative on Wall Street. As Joe Mysak writes in a Bloomberg.com article, “individuals with less than a $10 million net worth are not wealthy enough for Wall Street securities firms to care about them. These companies, such as Merrill Lynch, UBS AG, Bank of America and Citigroup, are the same ones that claim to specialize in retail or individual, investors.”

Several state and federal probes are responding to claims from smaller investors who say they were put out to pasture by their brokers. Last week, Massachusetts Secretary of State William Galvin issued subpoenas to UBS, Merrill Lynch and Bank of America for information on the marketing practices they used to sell auction-rate securities to clients.

Coincidentally, on the same day Galvin’s office issued subpoenas, UBS announced plans to begin cutting the value of the auction debt held by customers.

In reality, it’s the small investors who have been left out in the cold from the auction-rate securities freeze. These same investors also are the bread and butter for the majority of investment firms today. That makes it all the more ironic for Wall Street to turn its back on them now.

Maybe it does boil down to who has the biggest pocketbook after all.

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.Â

The downfall of the $330 billion auction-rate securities market has prompted state and federal regulators to delve deeper into the origins of auction failures and the many players involved.

In late March, Massachusetts Secretary of State William Galvin announced an investigation into the practices and protocol of some of Wall Street’s biggest players on how they marketed auction-rate securities to investors. Among the firms targeted: UBS, Merrill Lynch, and Bank of America.

Coincidentally, UBS began marking down the values of auction-rate securities held by its customers on the same day that Galvin issued subpoenas to the three investment firms.

Auction-rate securities are a $330 billion debt market with interest rates that reset weekly or monthly via an auction. Since Feb. 13, more than 60 percent of the auctions for debt sold by cities, colleges, student lenders and closed-end funds have failed. Banks like UBS, Goldman Sachs and Merrill Lynch that once supported the market have stopped bidding, due to lack of investor demand.

As a result, more than $300 billion is now frozen in auction-rate securities products. Estimates of $30 billion to $60 billion could be money from individual investors, according to an April 1, 2008, article by Katie Benner in Fortune magazine.

How It Began

As auction-rate securities continue to spiral downward, more industry watchers are predicting the death of this once viable market. Auction-rate securities were the brainstorm of Ronald Gallatin, an investment banker at Lehman Brothers. In 1984, his concept was to issue long-term securities that had short-term interest rates, which reset at weekly or monthly auctions. And the idea worked. For more than two decades, auction-rate securities enjoyed tremendous growth.

Then, of course, the bottom fell out. As in many corners of the financial markets, auction-rate securities got caught in the tangled web known as the subprime fallout. Unable to attract enough bidders, more and more auctions began to fail. Issuers of the auction bonds were then penalized via higher interest rates, sometimes as high as 20 percent. For a growing number of municipalities and nonprofits, this has spelled deep trouble.

From Wisconsin to California, municipal borrowers and nonprofits have been left with no alternative but to exit the auction market entirely, converting auction debt to fixed-rate bonds. The city of Vernon, California, for example, lost $7 million since mid-February on auction-rate bonds it sold to reduce borrowing costs for power plants and natural gas contracts.

Interest on some of the $482 million issued by the municipality has climbed as high as 18 percent since Feb. 15 from as low as 4.5 percent.

Vernon certainly is not alone. The same scenario is being played out across the country. The nation’s largest nonprofit hospital network, Ascension Health, began converting $1.4 billion of auction rate debt last week. On March 12, the Port Authority, the owner of bridges, tunnels, airports and transit facilities around New York City, sold $700 million of bonds to refinance auction securities after rates on the debt went to 20 percent from 4.3 percent in just one week.

There’s plenty of blame to go around for the failure of the auction-rate securities market. But even more important is what happens moving forward. The recent probe by Massachusetts Secretary of State William Galvin is a good start in that shines the spotlight on the need for greater transparency and accountability on Wall Street.

Perhaps most unsettling about the whole auction-rate securities story is this very issue - the breakdown in trust between clients and brokers. Many individual investors, senior citizens, families planning for retirement and their children’s college education, believed without a shadow of a doubt what their brokers told them - their investments were money in the bank, as liquid as cash, and would render high yields.

The lesson learned for these investors is a costly one indeed. More than losing their life savings or funds for retirement, however, they found out the hard way that brokers don’t always put the needs of customers first. It certainly sounds good on paper or in a company’s annual report, but unfortunately greed is sometimes the top dog.

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.

In what is no doubt the first of similar news to come, UBS has begun to lower the values of the auction-rate securities held by its clients. For investors who thought these securities were safe, cash-alternative investments, the move will be an unpleasant wake-up call indeed.

UBS says it will mark down the auction-rate prices from a few percentage points to more than 20 percent. More brokerage firms are expected to follow UBS’ lead in the weeks and months ahead.Â

On the same day UBS announced its decision to cut the value of auction debt held by its clients, Massachusetts subpoenaed the Zurich-based company, along with Merrill Lynch and Bank of America, for documents and information over how they marketed the securities to investors.

Background

Auction-rate securities are long-term bonds, with interest rates or dividend yields that are reset through auctions, typically every seven, 28, or 35 days. Historically, auction-rate securities have been popular investors, who were looking for a safe and liquid cash alternative investment. The recent string of failed bond auctions, however, has made auction-rate securities anything but safe.

More than $300 billion of auction-rate securities are held by investors, ranging from mutual funds and large institutions to wealthy individual investors, according to Moody’s Investors Service.

Historically, auction-rate securities were viewed as a low-risk, liquid investment. In recent months, however, countless auctions have failed because there were no bidders. Investment banks that typically supported the financings to prevent an auction from failing are no longer stepping up to the plate. This drives down the price of these securities.

Unfortunately, investors are learning the hard way that the bad news is far from over. Until now, many brokers told customers who were unable to sell securities in scheduled auctions that the securities would nonetheless retain their full value.Â

UBS’ mark down of auction-rate prices confirms this is not the case. Nor does the company plan to offer to buy the securities at the new prices. Instead, UBS will reclassify the securities from cash alternatives to fixed-income investments beginning in April.
Marten Hoekstra, head of wealth management at UBS for the Americas, said only 13 percent of the securities would retain their full value, with more than two-thirds seeing a reduction in value of up to 3 percent.Â

UBS has not disclosed the total value of auction-rate securities held by its clients; at the end of 2007, the bank’s U.S. wealth management unit oversaw about $743 billion in client assets.

The issues surrounding the auction-rate securities has led to a number of lawsuits, including one by the U.S. District Court in Manhattan, which is suing UBS, Deutsche Bank AG, Merrill Lynch, Morgan Stanley and Citigroup for their alleged deceptive marketing of auction-rate securities.Â

As for their part, the investment firms deny any improper conduct, and say they are working with clients on a case-by-case basis to address investor concerns.

Moving forward, analysts predict that more auction-rate securities lawsuits are in store, as investors make the unpleasant discovery that their investments are worth far less and likely to never recover in value.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.

Several large investment banks - UBS, Merrill Lynch and Bank of America - have been issued subpoenas by Massachusetts Secretary of the Commonwealth William F. Galvin for documents and testimony on what they told investors regarding the risks of auction-rate securities.

The auction-rate securities in question are mostly preferred shares in closed-end mutual funds. Galvin initially began his investigation into auction-rate securities last month, when he sought information from nine asset managers on their experiences with closed-end mutual funds.Â

In the past few weeks, auction-rate securities have come under fire from investors and regulators alike. Unable to attract bidders, a record number of auctions have failed across the country. As a result, the market has become essentially frozen, leaving investors unable to access their money.Â

As in Massachusetts, regulators are now stepping in to determine the role that major investment banks, which sold the securities, might have had in the failed auctions. Massachusetts also is investigating whether these investments were suitable for investors in the first place. Â 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.

The collapse of the auction-rate securities market has left more and more investors holding empty investments – investments they thought would act like cash.

For years, the $330 billion auction-rate market has operated smoothly. It was a rare instance for an auction to fail. In the fallout of the subprime meltdown, however, all that changed. The credit market tightened and auctions failed to attract bidders. Today, the auction-rate securities market is all but frozen.

The implication of the auction-rate freeze for thousands of investors and small businesses is critical. Many companies placed their cash into auction-rate securities on the belief they were similar to cash alternatives. But when they needed funds to make payroll, it was a different story altogether. Their accounts were frozen.Â
A similar scenario faces individual investors, who placed college money for their children, tax monies, and retirement funds into auction-rate instruments only to learn they cannot withdraw their funds from the supposedly safe, cash equivalent investments.

As of the end of March 2008, more than 71 percent of the auctions in auction-rate securities have failed. Previously, major banks – including UBS, Merrill Lynch and others – that collect fees for running auctions had stepped in with their capital to prevent auction failures when there were no bidders. Now these firms are unwilling to commit their money, following major write downs and credit losses stemming from the subprime mortgage collapse.

Meanwhile, auction rates on tax-exempt, seven-day auction bonds rose to 6.73 percent in March, compared to an average of 3.94 percent for 2007. The yield is more than three times higher than taxable Treasury bills, according to Bloomberg.com.

As result, many state and municipality issuers are desperate to come up with some viable solutions. Florida’s largest property insurer, Citizen’s Property Insurance Corp., recently approved plans to refinance some of its $4.5 billion of auction securities with fixed-rate bonds and variable-rate demand notes, according to Jeremy Cooke of Bloomberg.com.

Others are trying to flee the auction-rate securities market altogether. Already, several closed-end bond funds are attempting to redeem preferred shares: Calomos (5 funds), ING (2 funds), Nuveen Investments (13 funds), and Eaton Vance Corp. (3 funds) announced they intend to go this route, buying back at least some of their auction-rate preferred shares.

The MeltdownInterest rates on auction-rate bonds are determined by a bidding process, which usually occurs every seven, 28 or 35 days. If an auction fails to attract enough bidders, it fails. The issuers are left holding the securities and subject to penalties in higher interest rates, which are specified in official documents at the time of the initial bond sale.

Municipalities from Wisconsin to New York simply cannot afford the higher interest rates. The latest issuer to be hit is New Hampshire, which was forced to use its reserves to cover the more than $1 million in extra borrowing costs attributable to the auction market freeze.

The collapse of the auction rate market has finally gotten the attention of state and federal regulators. Last month, the Massachusetts Secretary of State announced his investigation into the practices used to sell auction-rate securities by Merrill Lynch, UBS, and Bank of America.

Not surprisingly, a number of lawsuits have filed by individual investors against some of Wall Street’s biggest players. Plaintiffs are angry that they cannot get their money out of investments they thought were low-risk and as liquid as money-market funds and savings accounts.

Until the smoke clears from the auction-rate securities debacle, investors need to keep careful track of all records regarding any direct (i.e. loss of value of investment) or indirect (i.e. tax penalties, lost opportunities) impact they experience as a result of these investments. If, like a growing number of investors, you were misled with false promises that auction-rate securities were cash-like investments, you may have cause for legal action.

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.

The after-effect of the subprime meltdown has fueled a firestorm of damage on the $330 billion auction-rate securities market. Following hundreds of failed auctions, the market is essentially frozen, leaving investors wondering if and when they will ever see their money again.

And while investors are left holding an empty bag, brokerage firms continue to get paid by the issuers of the bonds for holding auctions that fail. For example, as of mid-February, New York State reportedly paid 10 investment banks more than $600,000 to handle bids of auction bonds, even though the auctions failed and the state has paid higher penalty interest rates. The investment banks, which include Citigroup and Goldman Sachs, receive $10 million each year to oversee the auctions.

Auction-rate securities are long-term bonds that act like short-term debt, with floating interest rates that reset through a bidding process held every seven, 28 or 35 days. In the past several months, the market has witnessed a slew of failed auctions on a daily basis. During the last week of March, auction-rate bond failures rose to 71 percent, with 2,023 out of 2,865 auctions failing.

Investment firms that handle the auctions, such as Merrill Lynch and UBS, used to step in and support the auctions if there were not enough bidders. No more. As a result, issuers of the bonds are forced to pay exorbitant penalties in higher interest rates, while investors are locked into investments they can’t cash out of.

Some borrowers, including the Dallas Ft. Worth Airport and Ascension Health in Missouri, are refinancing their bond debt as a way to avoid paying high penalty interest rates. The Dallas Ft. Worth Airport converted $337 million of auction debt into fixed-rate bonds at interest rates as high as 6.25 percent, which is still considerably lower than the penalty rates on some auction-rate securities.

As for investors, many who are stuck holding auction-rate securities believe they were misled by their brokers, and contend they positioned the investments as “cash alternatives.” On March 27, Massachusetts Secretary of State William Galvin announced that his office would take several investment firms to task on this very issue in an investigation into the practices used to sell auction-rate securities at UBS, Merrill Lynch and Bank of America.

Whether Galvin’s investigation provides an acceptable resolution for the countless numbers of investors who have been forced to put their life on hold in many instances because money they thought was liquid is tied up in these frozen securities is anyone’s guess. At the very least, it will hopefully signal the end of the free lunch that so many brokerage firms in the auction-rate securities market have relished all these years.

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.Â

Massachusetts’ top securities regulator is turning up the heat on several Wall Street heavy hitters as part of a probe into the $330 billion auction-rate securities market.

Subpoenas were issued by William Galvin, Secretary of the Commonwealth of Massachusetts, on March 28, 2008, to Merrill Lynch, Bank of America Investment Services and UBS Securities for documents and information on how the companies marketed auction-rate securities to investors.

Galvin began his investigation into the auction-rate securities market after his office received numerous calls from investors, who said they thought they had invested in safe, cash-alternative investments. It was only later, when their accounts were frozen and they could no longer withdraw money that they learned it was actually auction-rate securities that had been purchased.

In the past two months, auction-rate securities have been caught in a downward spiral, with more and more auctions failing to attract bidders. Banks that normally stepped in to buy unsold securities backed off their support, already encumbered with large amounts of securities whose values have nosedived.

The lack of confidence in the auction-rate securities market continues to intensify daily, with a number of analysts predicting that this type of structure could go away entirely. Meanwhile, the list of brokers facing litigation alleging they concealed the risks of the bonds gets bigger by the minute.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.Â

Thousands of employees at Wall Street firms may lose their jobs in the coming months as the subprime crisis and related credit crunch persist. In fact, job cuts “could be more than 100,000 in a few years,” said Jo Bennett, a New York-based executive search firm specialist. According to USA Today, New York City alone could suffer the loss of more than 20,000 financial sector jobs over the next two years.

The job cuts signify the troubles faced by many firms and could affect investments in the long-term. In an effort to control costs, many Wall Street firms already drastically reduced their workforce. More than 34,000 financial sector employees lost their jobs in the last nine months because of the subprime crisis and credit crunch, reports Bloomberg.com. At least 11 firms cut over 1,500 jobs. Citigroup, Lehman Brothers, Bank of America, Morgan Stanley, and Merrill Lynch have been hardest hit by job cuts to date.

Going forward, the likelihood of further consolidation within the securities industry puts more jobs at risk. For instance, JPMorgan’s recent agreement to buy out Bear Stearns could lead to the elimination of thousands of jobs. While the subprime crisis and credit crunch linger, investors should keep a wary eye on the viability and strength of the firms that invest their money.

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.Â

The subprime crisis keeps singing the blues for Bank of America.

Reportedly the company may take a record $6.5 billion provision in the first quarter of 2008 to cover possible future losses in its subprime mortgage portfolio and home equity portfolio, according to analyst Richard Bove.

Predictions of continuing troubles for both of these market segments have been widely forecast in the media lately. An article in Business Week titled “The Home Equity Crisis Ahead” detailed the deterioration of the $850 billion home equity market in January with Amy Crews Cutter, deputy chief economist at Freddie Mac, quoted as saying: “The home-equity lender is going to get hosed.”

Similar opinions were touted by Princeton economist Paul Krugman, in the March 31, 2008, issue of Fortune magazine. Specifically, Krugman said: “I think there’ll be $1 trillion of losses on mortgage–backed securities showing up somewhere.” (For the record, securities firms and banks have thus far disclosed about $195 billion in losses related to the mortgage markets.)

Meanwhile, whether Bank of America’s two portfolios experience the level of losses it expects to put aside remains to be seen. It’s all contingent on the economy and developments in the housing markets, Bove says.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.