Are Investment Banks Taking the Necessary Steps to End the Auction-Rate Securities Crisis?

More than 80 days into the auction-rate securities crisis, about $300 billion
in investor funds continue to remain inaccessible. It is important to note that taxpayers, in addition to investors, are suffering in this frozen market because the municipal issuers (including schools, towns, highway authorities, and other entities) of auction notes are being asked to pay up to help restructure and redeem the debt.

$78 billion in auction-rate securities-many of them involving municipal notes that come with high interest penalty rates-are expected to be redeemed. Investors with remaining issues, however, aren’t us lucky.

According to Saber Partners Chief Executive Joseph S. Fichera, one option is for investors to try and sell on the Restricted Securities Trading Network, which would allow them to exit while letting municipal issuers repurchase securities at a savings. He also says that issuers might also want to renegotiate contracts to get rid of payments for failed auctions and unsold securities.

Meanwhile, Wall Street continues to generate money from this ongoing debacle. Investment firms continue to tell municipal issuers to repurchase their securities at par, because to recommend that they redeem at discounts could cause the firms’ own customers to record losses-and lead to potential arbitration cases.

The investment banks also continue to generate fees for their services in running these auctions even though 70% of these weekly securities auctions are failing. Investment companies also earn banking fees when municipal issuers redeem their securities and/or unwind derivative contracts tied to the securities.

On April 28, U.S. Representatives Deborah Price (Ohio) and Spencer Bachus (Ala) asked SEC Chairman Christopher Cox to grant “temporary relief” from current regulations so that closed-end fund investors with auction-market preferred stock (AMPS) could be afforded some protection.

They say the move could inject much needed liquidity into the marketplace that would benefit both preferred and common shareholders. They also noted that several affected funds might be interested in issuing a new kind of preferred stock with a “put” option that could restore auction market functioning for these kinds of securities.

The stockbroker fraud law firm of Shepherd Smith and Edwards represents investors that have lost money because of the negligence, carelessness, or misconduct of investment banks, brokers, and other securities industry members.

Related Web Resources:

Securities investors say they were misled,, April 30, 2008
Restricted Securities Trading Network

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