Auction Rate Securities (ARS)– Where is My Money?
Undeniably, the mortgage lending crisis has spilled over into our broader economy and is now affecting nearly everyone’s pockets. 401(k)’s, which undoubtedly hold many financial stocks, are taking a beating. Foreclosures are plaguing neighborhood property values and gas prices, mixed with a pinch of a declining federal funds rate, are raising the likelihood of drastic inflation. This perfect recipe for recession doesn’t stop here, starting in February, our under the radar market of Auction Rate Securities (ARS) began to freeze up and now many investors of all walks of life have started to panic.
Now, the investors are demanding answers, and regulators are starting to make noise. How could this happen? How could investments sold with the pitch of being safe and liquid suddenly freeze up? Why weren’t investors warned that this was a possibility and more importantly, why were these products sold to people without proper warning and disclosure.
While industry leaders, regulators, and Congress put their thinking caps on to think of a creative ways to pump some life into this dead market, it’s important for those with money tied up in these investments to understand what exactly these ARS are and what, if anything, can they do about it.
What is an Auction Rate Security (ARS)
An auction rate security is basically exactly what it sounds like, a debt instrument bought and sold through Dutch auctions. They consist of bonds sold by municipalities and mutual funds. They were intended to be long-term maturing securities with the “option” to sell to others at an auction. At these auctions, brokers would sell your shares to other investors, which would allow you to completely get our of the market and use your money for other purposes, like a down payment on a home.
Auction rate securities were so appealing to investors because they offered what appeared to be a very liquid investment that enjoyed returns that were higher than traditional money market funds. These “cash equivalent” investments, or so they were sold as, sound like a no brainer at the surface, which is why so many investors chose them. However, for the most part, ARS were sold to investors, not the other way around, without warnings of possible losses.
The problems began in early February when investors stopped bidding on these at auctions. Typically, when investors stopped bidding on ARS in the past, investment banks would swoop in and buy up the unsold securities, which kept the market liquid. However, major financial institutions currently find themselves strapped for cash, which stopped them from being this bidder of last resort. Although this is somewhat of an oversimplification, the market of ARS has frozen, simply because there are no buyers.
Some investors are selling their part in what is called the Secondary Market for ARS. In this secondary market, sellers are willing to sell their shares in between auctions to others at a discount. Meaning, they take a hit, just to get some of their money back.
What Can I Do, What Are My Options?
1) Your first option is to wait with hopes of eventually finding a buyer.
2) If your situation is more immediate you can call your state securities regulator and an investigation could start depending how the security was sold.
3) You can file a complaint with the Financial Industry Regulatory Authority (FINRA) or the Securities and Exchange Commission (SEC).
The Auction rate securities market is yet another sign that our markets have innovated further and faster than our oversight - leaving investors with little protection. Any product sold as something as safe as cash, had better be as safe as cash or the broker and the firm should be held responsible. Hopefully, our financial leaders find a way to give people confidence to buy into this market again and quickly. $
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