Corporate Governance

Auction Rate Securities -- Not Quite the Same as Cash.

By Jason Cowart

By now you know (perhaps all too well) that countless investors who were told by their brokers that so-called Auction Rate Securities were "as liquid as cash" have seen that liquidity dry up.  For the uninitiated, Auction Rate Securities are essentially bonds that carry an interest rate that is re-set through auctions that occur (generally)every 7 days.  Unfortunately, these auctions started to fail recently, leaving investors without any ability to cash out.   

Now, regulators including the SEC, FINRA and various State AGs are rushing in to determine what was going on and how this happened.  While there will certainly be years of litigation to unravel the specific answers to these questions, one thing is already clear -- investors didn't have enough information about these investments (or the type of mortgage-backed securities that are causing so much heartache) to accurately price their risk.  We'd like everyone to remember that the next time Secretary Paulson starts waxing poetic about the burdensome nature of issuer disclosure obligations.

For those who want more information on the problem, you can contact us.  You also might find Harry Newton's blog of interest.     

Full post as published by PomTalk on April 10, 2008 (boomark / email).