Are Investment Banks Really Trying to Fix the Auction-Rate Market?

The WSJ reported on the market in auction-rate securities yesterday:

Last week, UBS said it was marking down an undisclosed amount of the value of auction-rate securities held by its customers. Other banks, including Merrill, aren't marking down their values. In both cases, banks are scrambling furiously to fix the frozen market.

Um, scrambling furiously? As far as I can tell, they're doing Absolutely Nothing. There's certainly no evidence in the article of any concrete actions the banks are taking to fix this problem.

Indeed, the whole problem with this market is that the banks stopped scrambling furiously to provide a bid in every auction which came along. So long as the banks made a market in these securities, everything worked fine. Then they stopped making a market, and the market, predictably enough, froze up.

Quite clearly the investment banks here were the proximate cause of the problem. The WSJ is being far too polite in suggesting that in fact they're frantically working towards a solution.

Comments

[ESER.org:]

As yet another unfortunate investor in these Auction Rate Securities, I've been befuddled that I can negotiate a price for durable goods on EBay any day-of-the-week, but I can't get my stock broker to find a buyer for my Auction Rate Securities -- no matter what discount I'm willing to sell at.

So, we've created an electronic secondary market at ESER.org for investors to directly buy and sell Auction Rate Securities with one another -- independent of the brokerage houses.

It's frustrating that none of the banks that have previously back-stopped the auctions of these securities are willing to step in and redeem the issues from their clients.

The decision of the Wall Street Banks to terminate back-stopping auctions of these securities has cut a swath right through the investment world -- from mid-size investors such as ourselves to large corporations.

We're running ESER.org (Electronic SEcurities Registry) at www.eser.org as a sort of public-service: sellers are free to list their Auction Rate Securities for sale; and buyers are free to browse the listings and negotiate pricing and settlement with the sellers.

Hopefully, a vibrant secondary market, such as ESER.org, will allow investors to cash-out of these illiquid Auction Rate Securities.

-ESER.org (Electronic SEcurities Registry): eser.org

2008 Apr 08 01:06 AM