auction rate

Auction Rate Preferred: the bail-out

by Thomas Mullooly on August 9, 2008

In one of my most recent posts I discussed the “ready to explode” product issued by brokerage firms called “auction rate preferred securities.”

Well, that didn’t take long.

In this past week UBS (the parent company of PaineWebber), announced they are spending $19 billion (yes, billion with a B) to buy back auction rate preferred securities their brokers had sold to their clients. Citigroup (which owns Smith Barney), announced they are doing the same — for $7.5 billion. Merrill Lynch announced that they will buy back $10 billion of these securities sold by their brokers over the next few months.

That is $36 billion these brokerage firms have whipped out their checkbooks for… and we haven’t even heard from Wachovia or Morgan Stanley yet! [click to continue…]

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Auction Rate Preferred Securities: a failure to disclose

by Thomas Mullooly on July 31, 2008

You may not have heard of the term “auction rate preferred securities.”

Yet.

If you have not, you probably will soon. Essentially, these are longer-term investments but they have an unusual feature: an interest rate that resets – usually every 7, 14, 28 or 45 days.

The “trick” to making this work is having multiple broker-dealers maintaining an orderly auction market. This provides liquidity for sellers to get out (raise cash) and allow buyers to move in. If the broker-dealers walk away from the market, the whole thing collapses like a house of cards.

Even though you may never have owned auction rate preferred securities, why should this be important to you? [click to continue…]

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