My clients will take 9+ tax free all day long

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.

[quote=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![/quote]
+1 there were even some nice 12% ers in there today!

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

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 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??

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.

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.

[quote=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??

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.

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.

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?

A-R-S: Arbitration Reimbursement Securities

[quote=doberman]A-R-S: Arbitration Reimbursement Securities

[quote=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.

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

[quote=fritz][quote=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.

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.

[quote=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.[/quote]
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.