Investors Jolted by Auction-Rate Securities Freeze
Investors who were assured that the auction-rate securities they purchased were as safe as cash recently learned that the promise wasn’t one that they could take to the bank.
That’s because the banks that sold the investments – Morgan Stanley & Co., Goldman Sachs, Lehman Brothers, Merrill Lynch, Citigroup and UBS – now won’t let investors withdraw their investment money. Some wonder whether they will ever get their money back.
Despite the sales pitch touting auction-rate securities as cash equivalents, the instruments are actually long-term securities. The securities would be auctioned off weekly or monthly by the banks to set the interest rates. The auction also afforded the holders an opportunity to sell the securities. But in mid-February, the auctions failed and the banks refused to support the auctions. As a result, clients who intended to buy short-term debt found themselves trapped.
G. David MacEwen, the chief investment officer for fixed income at American Century Investments, told the New York Times, “Investors have lost confidence in the liquidity of these investments. These types of instruments depend on new investors showing up to own the securities.”
This isn’t the first time the market has come under scrutiny. In 2006, 15 investment banks agreed to pay $13 million after a Securities and Exchange Commission investigation looked into the bank’s bidding conduct. The industry also agreed to a voluntary code of conduct.
Unfortunately for investors, the SEC’s action and the voluntary conduct code wasn’t enough to deter it from misleading investors.
If you hold auction-rate securities, contact Carey & Danis.
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