Auction-Rate Bonds Fail to Find Buyers

The auction-bond market has sailed into deeply troubled waters, and UBS (UBS), for one, will not buy the auction-bond securities that fail to attract enough buyers, according to Martin Braun and William Selway, writing in Bloomberg today and yesterday.

The second-biggest underwriter of the securities, whose rates are reset periodically at auctions, notified its 8,200 U.S. brokers of the decision yesterday, said [someone with direct knowledge of the situation, but] who declined to be identified because the announcement wasn't publicly disclosed. Goldman Sachs Group Inc. (GS), Lehman Brothers Holdings Inc. (LEH) and Citigroup Inc. (C) allowed auctions to fail as mounting losses from the collapse of subprime mortgages causes capital markets to seize up.

Bank of America Corp. (BAC) estimated in a report that 80 percent of all auctions of bonds sold by cities, hospitals and student loan agencies were unsuccessful yesterday. That may mean as much as $20 billion of bonds failed to find buyers, based on the $15 billion to $25 billion of auction-rate bonds that are scheduled for bidding daily, according to Alex Roever, a JPMorgan Chase & Co. (JPM) fixed income analyst.

Bloomberg lists entities from Georgetown University, and Nevada Power to New York State's Dormitory Authority and Metropolitan Transportation Authority, as having experienced failures in recent auctions. "It's the beginning of the end," as one analyst claimed.

The result: soaring interest rates. (Rates at failed auctions are set at a level spelled out in official statements issued at the initial bond sale). Rates on $100 million of bonds sold by the Port Authority of New York and New Jersey soared from 4.3 percent a week ago to 20 percent this week, according to Bloomberg, while Vermont's Student Assistance Corp. saw the rates on its federally taxable student loan debt jump from 5 percent to 18 percent. The debt issue is insured by Ambac (ABK), the first major bond insurer to lose its AAA credit rating.

Among those hurt by the auction failures are companies that bought such variable-rate securities as short-term investments, but are now increasingly hard-pushed to unload them, such as Bristol-Myers Squibb (BMY), which announced in January a $275 million writedown of its holdings.

Comments

[helplessobs...:]

And I remember Paul Wessel saying bank capital reserves at $2900 billion were adequate to extinguish the sub-prime mortgage problem. Also Ben Stein noted that sub-prime was only 5% of the mortgate market and no problem in a $14 trillion economy. So much for the experts, I hope they muzzle them in the future.

2008 Feb 14 12:11 PM

[Bhakta:]

It is about time the domino collapsed and reality sets in. The US has been living a dream for too long and the dream is now a nightmare.

I am looking at the tape this AM and it seems the only safe haven is in precious metal, commodities and energy.

2008 Feb 15 11:07 AM

[hattryx:]

someone has just made a filthy amount of money on this. not me, but someone. sure wish it was me

2008 Feb 15 11:51 AM

[bren:]

I hope and believe that what is happening now is just a way for an overpriced housing market to correct itself

2008 Feb 15 12:46 PM

[Bhakta:]

"Bren", I hope also, but this is like a tidal wave now that is unstoppable. Every act has a reaction, and no one can see clearly what the ramifications are. Had the FED not drove up rates for 17 consecutive quarters, and just left them alone, people could perhaps have made their payments, and property values would have stabilized. The FED wanted to stop the "inflation", and the result is now serious deflation in property, and inflation in everything else. Is there a worse scenario economically?

2008 Feb 15 07:02 PM

[User 159134:]

so who is buying the high interest ars's.

2008 Mar 01 11:53 PM