Auction Rate Settlement Leaves Many In The Dark
The settlement brokered by New York Attorney General Andrew Cuomo with investment banks to buyback billions in auction rate securities will only help a fraction of the investors that bought into the trouble market.
The deals so far announced total about $56 billion of the auction-rate securities market — but there are $210 billion of such securities unredeemed, according to research firm Restricted Stock Partners.
Basically unless you were a client of one the brokers running the auctions you could be out of luck. Investors that bought from discount brokerages could be stuck holding the bag, since their brokers had no knowledge of the breakdown in the auction rate market and for the most part have not been considered liable.
The investment banks that underwrite the actual auctions are only agreeing to take care of their own clients and even then there are still some gray areas. Short of legal action it will be unlikely the majority of investors will see any of their money anytime soon.
With investment banks desperate for capital they will probably fight tooth and nail to buyback as little as possible. However, these investments aren’t really in danger of failing, as much of it is made up of relatively safe municipal bonds.
The sticking point and the crux of the government’s argument with investment banks is that auction rate securities are in actuality long term investments but they were marketed as “like cash”. Interest rates reset on the securities usually every 7 or 28 days so that investors were able to quickly get into and out of the market until auctions started to fail back in February.
