Thursday, April 03, 2008

More on Auction Rate Securities

The Wall Street Journal published an article this past Tuesday on auction-rate securities, with another one this morning. Recently, I've been getting a large number of readers coming to my blog for this post from mid-February.

Probably the best that can be said is that nothing has improved about this situation.

In Tuesday's article, the Journal reported that UBS has begun writedowns of retail account holders' auction-rate assets. Today's article noted that, by contrast, Merrill Lynch is still recording them at a higher value to its retail customers, although they note that the firm itself has reduced the values at which it carries comparable auction-rate securities.


To attempt to end the mess involving these notes, some issuers either calling their own notes or simply refunding with conventional long term debt.

But it's noteworthy that nearly two months after the Journal's first mention of this market failure, the only 'solutions' in sight are the same as those originally mentioned- lending to customers on the collateral of a reduced value of the auction-rate securities, and calling/reissuance of the auction-rate securities as conventional longer term securities.

Is this not essentially indicative of an instrument which has no further use in current markets?


Like a hot-house flower, it seems that auction-rate securities could only exist and thrive in a rather narrowly-defined financial market condition. A condition of fairly easy and low-risk credit which has now vanished from current credit markets.

At this point, it is probably fair to say that the word 'fix' doesn't really apply to the auction-rate securities dilemma. A word like 'end' or 'terminate' seems more applicable. In time, one suspects that these securities will simply disappear as they are replaced by less-volatile, truly more cash-equivalent securities.

Hopefully, both issuers and buyers will now be more sanguine and suspect when Wall Street securities salespeople insist that some abstruse, complex instrument is 'as safe and liquid' as cash.

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