Beware of Auction-Rate Securities

The $330 billion auction rate market is dominated by municipalities and tax-exempt organizations. Banks hold weekly auctions to set rates on bonds and give investors the option of selling the bonds that they own.

Banks have pitched these investments as safe, cash-equivalents. Are they, or are they something much riskier?

The answer depends upon whether the investors can sell them. Investors are suing for losses and at least one company, Bristol-Meyers, has taken a huge write-off of $275 million it invested when it was unable to sell because of failed auction markets.

Banks such as Goldman, Lehman and Merrill have told investors these are liquid securities. That's not true anymore. This week almost 1,000 auctions (to sell) failed. The banks also refused to support the auctions, leaving many investors wondering when (and if) they will get their money back.

SNSFE is investigating failed auctions and investment losses/illiquidity associated with them.

Source: New York Times