Auction rate securities

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Mar 27, 2008 11:36 am

Hey,



Does anyone have a story to share on these? Whether it's a client that has thousands or millions frozen in the ARS market he/she needs or a firm that pushed these particularly hard as good alternatives to MMKs.



I know the big firms are helping out with 50% loans, but from what I'm hearing some clients are still stuck. Also, did brokers who put clients in these fully understand the auction process, the potential for auction failure? Did the firms? What are the higher-ups at firms saying about this mess?



Thanks for the help.

Mar 27, 2008 9:47 pm

My clients will take 9+ tax free all day long

Mar 27, 2008 10:16 pm

Yes every dealer said that they provide liquidity as a SERVICE to the client.  It was disclosed that this was not mandatory and at the discretion of the dealer.  I feel this is a broker problem, not a firm problem.  According to Cutter, the brokers knew this could happen.  I am also with AGE/WS and read the same disclosures and made the choice to discuss these risks with my clients.  I also did my own research and had $0 in ARS when the ---- hit the fan.  Just as I have dumped most (recomended all) leveraged muni funds I have to avoid the deleveraging problems that are starting to arise.  At the end of the day, clients rely on the advisor to provide guidance and if the broker knew of the risks and made the choice not to disclose them or worse ignore them, then the broker should be held responsible.

Mar 27, 2008 10:42 pm
Ferris Bueller:

I'm buying the snot out of the ones that have penalty rates over 9%, Beats buying some crappy 4.5% 25 year bond, just make sure the client understands. What do I do when the thing gets called and I can't get that rate anymore!


+1 there were even some nice 12% ers in there today!

Mar 27, 2008 11:50 pm

I really don't think most brokers failed to disclose the risks, or chose to ignore them. 

Mar 28, 2008 9:48 am

Ferris/Cutter Jon/Others,



This is very helpful, so thanks. Here are a couple more questions:



1)Is that 25bp fee pretty standard for muni-ARS? ARPS? How does that compare to the fee for a money market?



2)A class action attorney I spoke with yesterday, who is suing all wirehouse firms--and yes, very excited about his prospects--says the firms were pumping these because of the circular nature of the fees. According to him, the firms made fees every which way: underwriting the security, managing the auction, then selling their own inventory of the stuff. What do you guys say to that? Was there a profit motive for this stuff that might have blinded firms to the potential for problems, especially 6-12 months ago when they may have had an inkling of what was to come?



Thanks for the input.

Mar 28, 2008 5:34 pm

I wonder what this will do to the closed end fund market when they are forced to sell securities at depressed prices to unwind ARCS/APS.  How long before other firms mark down the value of clients securities??

 
UBS to Mark Down Auction-Rate Securities

http://biz.yahoo.com/ap/080328/ubsauction_rate.html?.v=1
 

TORONTO (AP) -- UBS AG said Friday it is cutting the value of auction-rate securities in its brokerage customers' accounts, the first confirmation that problems with the securities have eroded the principal holdings of investors.

Until now, customers who were unable to sell securities in regularly scheduled auctions were told that the securities retained full value and would receive higher interest rates.

UBS, however, using an internal model to value the securities, will mark them down Friday and inform clients via their online statements. The markdowns will range from a few percentage points to more than 20.

"This is the right thing to do," said Martin Hoekstra, head of wealth management at UBS. "It doesn't make sense to delay the pain. As a principal, we think we should tell clients what their securities are worth, and if it's an illiquid market, estimate what they are worth."

The losses won't be realized immediately, as investors can't sell the securities for lack of a market. But the unilateral move is sure to roil relations between brokers and their clients, who generally believed they were buying investments that were a safe alternative to cash offering a slightly higher yield.

UBS wouldn't disclose the total value of auction-rate securities held by its clients, but Hoekstra said it was "a reasonable amount" concentrated among wealthier clients. The banks U.S. wealth management unit oversaw about $920 billion in client assets at the end of 2007.

The brokerage industry has used auction-rate securities as cash alternatives for nearly two decades. More than $300 billion of the securities are held by investors ranging from mutual funds and corporations to wealthy individual investors, according to Moody's Investors Service. The securities are long-term bonds sold by issuers such as municipalities, arts organizations, universities and closed-end mutual funds like Nuveen Investments and BlackRock with interest rates reset in auctions held every 7 to 35 days.

The auctions are failing, because banks such as UBS, Goldman Sachs Group, Merrill Lynch, Citigroup Inc. and Wachovia Corp. that often conduct more than 100 auctions a day have balked at buying the securities when there aren't enough bidders.

The banks fear putting the assets on their own debt-laden books, and other investors are shying away out of fear they will be stuck with unsellable securities.


Mar 28, 2008 5:55 pm
Senior Editor:

Ferris/Cutter Jon/Others,

This is very helpful, so thanks. Here are a couple more questions:

1)Is that 25bp fee pretty standard for muni-ARS? ARPS? How does that compare to the fee for a money market?

2)A class action attorney I spoke with yesterday, who is suing all wirehouse firms--and yes, very excited about his prospects--says the firms were pumping these because of the circular nature of the fees. According to him, the firms made fees every which way: underwriting the security, managing the auction, then selling their own inventory of the stuff. What do you guys say to that? Was there a profit motive for this stuff that might have blinded firms to the potential for problems, especially 6-12 months ago when they may have had an inkling of what was to come?

Thanks for the input.

 
I think they paid 15 bps to us, same as bank deposit.  I really can't speak to what the firms made on the auctions and selling their own inventory....
Mar 28, 2008 5:59 pm
Iocaine:

I wonder what this will do to the closed end fund market when they are forced to sell securities at depressed prices to unwind ARCS/APS.  How long before other firms mark down the value of clients securities??


 
the closed end funds report differently i believe and they are not going to write down the value due to the seize of the ARS market.
Mar 28, 2008 7:43 pm

Guys: don't answer this Senior Editor's guy. He's obviously the lawyer for the class action suit. Read his posts. What a Joke. You are not that gullible---right? The guy is a loser. If you want to be sued...keep it up. The auction notes were and are a viable solution for clients. End of story. Buy the ones that have popped up.

Apr 1, 2008 11:31 pm

My clients who own ARS are extremely happy with the maximum rate that they've been getting.  Fortunately, they do not mind that the money is illiquid.  In fact, one client wanted to purchase more but I persuaded him to wait and see.

 
On another note, got a B of A update that some of the Student Loan ARS are resetting at 0%.  There's some math involved about why it's occuring and really no advice given except to reach out to customers and let them know that if they hold these for the long term, they will eventually receive short term Treasury rates.
Apr 8, 2008 11:13 am
If your clients are getting the maximum rate right now, be careful because they might get 0% very soon.  ARC's basically have a provision built in that lets them take a look back at the average rate over the past 12 months or something of that nature.  So if the ARS is currently paying the penalty rate of 15% of whatever, the issuer has the right to bring the yield down to the average rate or a precalculated rate of LIBOR +.  And if that means paying 0% for a while, that is what they are going to do.
 
Student loan ARC's are particularly dangerous because unlike a muni ARC, the student loan issuers have no incentive to refinance.  That's why none of the auctions are clearing.  In the muni ARC market, they're clearing for the most part.
 
BACFA:

My clients who own ARS are extremely happy with the maximum rate that they've been getting.  Fortunately, they do not mind that the money is illiquid.  In fact, one client wanted to purchase more but I persuaded him to wait and see.


 
On another note, got a B of A update that some of the Student Loan ARS are resetting at 0%.  There's some math involved about why it's occuring and really no advice given except to reach out to customers and let them know that if they hold these for the long term, they will eventually receive short term Treasury rates.
Apr 8, 2008 3:49 pm

The rates are pegged to the 90 day treasury yields + a spread of 120-150 bps and then they are averaged over 12 months.  If the rate stays high for too long and eclipses that average you should see rates begin to reset at 0% to compensate.  How happy will that make your illiquid clients?

 
"Sorry Mr. Smith, I can not get you access to your principle but the good news is you are earning 0% while we wait this out.  How about a margin loan based off prime to tide you over while we wait for brighter days?"
Apr 8, 2008 8:00 pm

A-R-S: Arbitration Reimbursement Securities

 
 
Apr 8, 2008 9:33 pm
doberman:

A-R-S: Arbitration Reimbursement Securities

 


   Well played, dobe!

Apr 12, 2008 6:06 pm
BACFA:

My clients who own ARS are extremely happy with the maximum rate that they've been getting.  Fortunately, they do not mind that the money is illiquid.  In fact, one client wanted to purchase more but I persuaded him to wait and see.

 
On another note, got a B of A update that some of the Student Loan ARS are resetting at 0%.  There's some math involved about why it's occuring and really no advice given except to reach out to customers and let them know that if they hold these for the long term, they will eventually receive short term Treasury rates.
 
Guess a broker at ML in La Jolla's clients were not so happy...Top producer in the office jumped of Coronado Bridge Monday morning at 5:30 in the morning, instead of going into work he decided to end it.  From what I here his book was 90% ARS... Sad Story, hope the family gets through this.
Apr 12, 2008 6:15 pm

Wow that is rough.  Yet another reason we should take are own advice and diversify our books.

Apr 12, 2008 8:45 pm
fritz:
BACFA:

My clients who own ARS are extremely happy with the maximum rate that they've been getting.  Fortunately, they do not mind that the money is illiquid.  In fact, one client wanted to purchase more but I persuaded him to wait and see.

 
On another note, got a B of A update that some of the Student Loan ARS are resetting at 0%.  There's some math involved about why it's occuring and really no advice given except to reach out to customers and let them know that if they hold these for the long term, they will eventually receive short term Treasury rates.
 
Guess a broker at ML in La Jolla's clients were not so happy...Top producer in the office jumped of Coronado Bridge Monday morning at 5:30 in the morning, instead of going into work he decided to end it.  From what I here his book was 90% ARS... Sad Story, hope the family gets through this.


Sad IF that is true...however I cant imagine anyone w/ a book of 90% ARS...I would end it all along time before now...making 15bps on 90% of the book lol!

Apr 12, 2008 9:36 pm

SUBSTANCIAL ASSETS...Did not own one equity position in his book.  Unfortunately it is true, very very sad story.  Had a family with two kids.  Me personally If the pressure was that high I would have just walked in and resigned.  If that means downsize the house and cars so be it.

Apr 13, 2008 1:09 am
fritz:

SUBSTANCIAL ASSETS...Did not own one equity position in his book.  Unfortunately it is true, very very sad story.  Had a family with two kids.  Me personally If the pressure was that high I would have just walked in and resigned.  If that means downsize the house and cars so be it.


He must have had many hunderes of millions under management to make anything decent off of ARS, but anyway IF it is true that does suck. Nothing this biz can do is worth dying for. Another reason why you never put all your eggs in one product basket no matter how safe it seems.