Harry Newton's In Search of The Perfect Investment
Technology Investor. Auction Rate Securities. Auction Rate Preferreds.
8:30 AM EST Tuesday, March 18, 2008: Update
on Auction Rate Preferreds (ARPs). The Federal Government bailed out Bear Stearns
and gave J.P. Morgan a huge present. The Federal Government also is bailing
out other investment banks who are now allowed to borrow directly from the Fed
Reserve. Only regulated banks were permitted until this weekend.
the Feds have ignored the plight of you and I -- owners of auction rate preferreds
(ARPs) -- who can't get to our money. The only reason J.P. Morgan got it and
we didn't is they made a loud urgent noise in Washington. We haven't.
For us to get
our money back quickly, we need to be contacting Washington -- from the Fed
Reserve to our Congresspeople, to Henry Paulson, Ben Bernanke, etc. Everyone
of us needs to be writing letters, making phone calls etc. The problem is that
most of us are standing mutely by, unwilling to stand up and scream out our
plight. Frankly, I've been disappointed -- and amazed -- how few people are
willing to talk to financial reporters and be quoted. (How few people are willing
to tell publicly their plight. Apparently most people believe there is a stigma
to having your wealth (or stupidity) revealed.
Let me state it
clearly: Unless you bring public pressure, this thing will solved on Wall Street's
timetable, which will be slow and painful.
As regards "news,"
there hasn't been much:
1. The uncertainty
(and the pain) continues: A public company called ExpressJet Holdings (XJT)
reported yesterday that it won't file it 2007 10-K annual report on time "because
it continues to assess the current marketability of approximately $65 million
face value of auction-rate securities it purchased in early 2008."
I'll call ExpressJet's CFO this morning and ask him what he's doing -- if anything.
But you'd think that a pubic company would tell you -- if only for the sake
of its poor, suffering shareholders:
issues standard "touchy-feely" statement. BlackRock is a huge
issuer of ARPs. Yesterday it said it was doing something:
Closed-End Fund Board of Trustees Exploring Potential Solutions for Fund Shareholders
Affected by Liquidity Issues in Auction Rate Preferred Shares
March 17, 2008
09:05 PM Eastern Daylight Time, NEW YORK--(BUSINESS WIRE)--BlackRocks
Closed-End Fund Board of Trustees has directed BlackRock to continue to actively
explore potential solutions for its fund shareholders affected by the lack
of liquidity in the auction rate preferred shares (ARPS) market. Richard Davis,
Head of the Office of Mutual Funds at BlackRock and a Trustee of the BlackRock
closed-end funds, said that BlackRock and the Board of Trustees have been
working diligently on this issue. BlackRock sponsors 66 taxable and tax-exempt
bond funds, which utilize preferred leverage and have $9.8 billion in ARPS
Mr. Davis said
that BlackRock and the Board are acutely aware of the difficulties that this
sudden event in the ARPS market has caused for preferred shareholders in need
of liquidity. This is an industry-wide and complex problem that will require
a certain degree of regulatory input. We understand the uncertainty
that our closed-end fund shareholders have faced, said Robert Kapito,
President of BlackRock. The construction of effective solutions that
address the best interests of our closed-end fund shareholders is BlackRocks
top priority. It is the firms intention to bring a resolution to this
difficult issue as soon as possible. BlackRock is in the process of
evaluating several different potential solutions and the Board is fully supportive
of BlackRocks efforts.
given the current short-term interest rate environment, that leverage remains
the most effective strategy to offer enhanced return potential to common shareholders.
There are several potential solutions under consideration that include the
refinancing of the ARPS with other forms of leverage, which may include debt
in the case of the taxable funds. One promising approach is the development
of a put feature for the ARPS, making them eligible for purchase by money
market funds. In addition, BlackRock may seek to introduce alternative forms
of leverage, which might include bank financing, lines of credit, margin commitment
facilities, repurchase agreements and/or the use of tender option bonds. At
this time, there is no assurance that the Board will adopt any of these potential
solutions, as the Board is assessing all alternatives, their viability both
short- and long-term and their impact on the common and preferred shareholders
of the funds. Any potential solution will be subject to execution risk and
dependent on both economic and market factors beyond BlackRocks control.
Therefore, BlackRock cannot provide a definitive timeline for a resolution
of this issue.
Given the current
market conditions, BlackRock assumes that auctions will continue to fail.
BlackRock recognizes the urgency of the matter and is working with all the
major industry participants, including broker dealers and commercial banks,
to evaluate ways to provide liquidity to the ARPS holders. BlackRock will
provide periodic updates to market participants and shareholders via press
releases and on its website at www.blackrock.com.
3. The law
suits have started: A San Francisco firm called Girard Gibbs llp (phone
415-981-4800) filed a class action suit yesterday against Deutsche Bank in connection
with the liquidity crisis affecting auction rate securities. The suit says that
"defendants (i.e. Deutsche Bank) represented to investors that auction
rate securities were equivalent to cash or money market funds, were highly liquid,
safe investments for short-term investing and were suitable for any investor
with at least $25,000 of available cash and as little as one week in which to
invest." The suit also says that "defendants knew, but failed to disclose
to investors, material facts about auction rate securities. In particular defendants
knew, but failed to disclose that these auctions rate securities were not cash
alternatives, but were instead complex, long-term financial instruments with
30 year maturity dates, or longer."
The suit also
says that auction rate securities were extremely profitable for Deutsche Bank
and for the financial advisors who sold the securities. And that Deutsche Bank
"engaged in a scheme and course of conduct to create a market for and artificially
inflate the price of auction rate securities sold by Deutsche Bank that operated
as a fraud or deceit on purchasers of auction rate securities."
asks that the court determine that this action is a proper class action, that
it award compensatory damages and reasonable costs, including legal and expert
I don't know what
the cost of joining this class action suit is. I shall find this out today.
You can read the
entire complaint. Click here.
Week ran this story yesterday:
Closed-ends fail to shut floodgates
Multibillion-dollar bailout effort by five fund firms aids just one-tenth
of auction-rate preferred market
March 17, 2008
Holders of certain
types of auction-rate securities received some salvation last week, as several
closed-end fund firms announced bailouts for investors in the illiquid securities.
But given the complicated nature of restructuring the debt, issuers and market
watchers say that there's still a long road ahead for many investors trapped
By Friday, five
firms offering closed-end fundsAberdeen Asset Management, Eaton Vance,
Nuveen Investments, ING Clarion Real Estate Securities and Gabelli Fundshad
announced that their funds had figured out ways to get some investors out
of frozen auction-rate preferred securities. APS are a specific type of auction-rate
security issued by closed-end funds.
the announcements by the funds could relieve investors of some $6.4 billion
in failed APS, but that's only about one-tenth of the APS marketwhich
totals $63 billion, according to Jeffrey Rosenberg, head of credit strategy
at Banc of America Securities.
want to find a solution as quickly as we can, said Jonathan Isaac, head
of Eaton Vance's closed-end fund business. There just needs to be the
understanding we can't help one shareholder to the detriment of another.
Mr. Isaac was
referring to the dichotomy between two kinds of closed-end fund holders: those
holding common shares, who are not affected by the disruptions in the auction-rate
securities market, and those holding preferred shares, who are.
securities are long-term bonds tied to short-term interest rates. Last month,
a significant portion of the market became frozen after auctions started to
fail. Closed-end funds issue APS to finance investment in additional securities,
as the leverage can boost returns, but the debt is held by preferred shareholders.
Roughly half of closed-end funds issued APS, said Cecilia Gondor, an analyst
at Thomas J. Herzfeld Advisors who specializes in closed-end fund research.
Ms. Gondor added
that any solution that would allow preferred shareholders to get out of APS
while keeping common shareholders happy is a complicated balancing act
for boards. Furthermore, even within funds at the same firm, there isn't
a one-size-fits-all solution, she said. Each fund has slightly different
economics, Ms. Gondor explained.
only three fundswith a combined $1.6 billion in APSout of 29 leveraged
Eaton Vance closed-end funds holding a total of $5 billion in APS, were able
to secure financing from a major financial institution, which Mr. Isaac declined
to name. The lender would finance only funds that had stock as collateral.
said Mr. Isaac, the three fundsTax-Advantaged Dividend Income, Tax-Advantaged
Global Dividend Income and Tax-Advantaged Global Dividend Opportunitieswere
paying an average penalty rate of 4.38%, so they had to secure a lender charging
less than that in order to borrow. A rate of borrowing higher than the penalty
rate would have negatively affected the common shareholders, Mr. Isaac explained.
Last week Nuveen
announced it would restructure the debt of 100 closed-end funds, which have
as much as $4.3 billion in failed APS. We are seeking to do two things:
first, reduce the relative cost of leveragewhich has increased due to
this historic turmoil in the auction-rate marketby replacing auction-rate
preferred shares with various forms of debt and other leverage, including
potentially a new form of preferred stock; and second, restore liquidity at
par for auction-rate preferred shareholders, CEO John Amboian said in
Income Fund, which is run by Aberdeen Asset Management, was the first fund
to announce it was buying back its APS, on March 7.
actions finally signal some good news for holders of auction-rate securities,
Mr. Isaac predicts that the market, in its present form, is not likely to
function normally anytime soon.
one day down the road, if structures are changed, people will come back to
the market, said Mr. Isaac. But we're not going to wake up and
find everyone [has] come flooding back. FW
5. This appeared
yesterday on Jim
Hamiliton's World of Securities Regulation:
Acts to Thaw Frozen Auction-Rate Securities Market
In an effort
to thaw the essentially frozen auction-rate securities market, the SEC staff
said it would not object if municipal issuers, conduit borrowers, dealers
and auction agents participated in bids for municipal auction rate securities.
In a letter to SIFMA signed by the directors of the Divisions of Market Regulation
and Corporation Finance, the staff conditioned the no-action relief on the
prompt disclosure following the auction of detailed information concerning
the bidding that occurred, including the amount of securities for sale in
the auction; the number and aggregate dollar amount of bids made; the number
of bidders, and the high, low and median bids received.
also be disclosure of any steps to avoid an auction leading to a below market
clearing interest rate, such as whether the rates bid would not be less than
an appropriate benchmark, such as the relevant SIFMA municipal swap index.
Further, there must be timely dissemination of the disclosures to the public,
including provision of the disclosures to nationally recognized municipal
securities information repositories and the financial press, coupled with
posting on publicly accessible portions of the websites of the participating
dealers, the municipal issuer's and the conduit borrower.
rate securities are municipal bonds with interest rates that are periodically
re-set through auctions, typically every 7, 14,28, or 35 days. Municipal auction-rate
securities are auctioned at par so the return on the investment to the investor
and the cost of financing to the issuer between auction dates is determined
by the interest rate set through the auctions. The interest rate is set through
a process in which bids with successively higher rates are accepted until
all of the securities in the auction are sold. The final rate at which all
of the securities are sold is the clearing rate that applies to all of the
securities of an offering until the next auction occurs. If there are not
enough bids to cover the securities. Hundreds of auctions for municipal auction-rate
securities recently have failed to obtain sufficient bids to establish a clearing
letter was issued because the SEC staff learned that a contributing factor
may be the reluctance of participating dealers to purchase in the auctions
due to uncertainty regarding the staffs views on the circumstances under
which participating dealers may accept bids from issuers desiring to participate
the SEC recognizes that appropriate disclosure in any particular case will
depend on all the relevant facts and circumstances. Among other things, the
staff believes that municipal issuers, conduit borrowers, participating dealers
and auction agents should consider whether an offer to purchase subsequent
to an auction is permissible under the contractual arrangements governing
the particular municipal auction rate securities. Also to be considered is
whether the submission of a bid by the municipal issuer or conduit borrower,
or by participating dealers acting on its behalf, and the acceptance or processing
of such a bid by participating dealers or auction agents, is consistent with
the issuer's or borrower's disclosure documents.
More on ARPs
tomorrow. Send me an email if you find something. Tell me what you're doing.
Send me copies of letters you're writing so I can publish the format for other
readers to follow. The class action suit actually has some good information
TV Schedule - 2008 Pacific Life Open at Indian Wells: Federer,
Nadal, Djokovic, Roddick and Blake are playing. Also Sharapova, Hantuchova,
Kuznetsova and Safina. The problem is finding Fox Sports Network on your cable
or satellite TV. Clue: Sometimes they hang out with MSG (Madison Square Garden).
This schedule is not accurate, but it's the best I can do.
story is probably apocryphal. But who cares?
This is a story about a big 300-guest wedding that took place at
At the reception,
the groom got up on stage with a microphone to talk to the crowd. He said he
wanted to thank everyone for coming, many from long distances, to support them
at their wedding.
He especially wanted to thank the bride's and his family and to thank his new
father-in-law for providing such a lavish reception.
As a token of
his deep appreciation he said he wanted to give everyone a special gift just
from him.Taped to the bottom of everyone's chair, including the wedding party
was an envelope. He said this was his gift to everyone, and asked them to open
Inside each manila
envelope was an 8x10 glossy of his bride having sex with the best man.
The groom had
gotten suspicious of them weeks earlier and had hired a private detective to
tail them. After just standing there, just watching the guests' reactions for
a couple of minutes, he turned to the best man and said, 'F---you!' Then he
turned to his bride and said, 'F--- you!'
Then he turned
to the dumbfounded crowd and said, 'I'm outta here.'
He had the marriage
annulled first thing in the morning.
While most people
would have canceled the wedding immediately after finding out about the affair,
this guy goes through with the charade, as if nothing was wrong.
His revenge --
making the bride's parents pay over $32,000 for a 300-guest wedding and reception,
and best of all, trashing the bride's and best man's reputations in front of
300 friends and family members.
Do you think we
might get a MasterCard 'priceless' commercial out of this?
reception for 300 family members and friends: $32,000.
commemorating the Occasion: $3,000
honeymoon accommodations in Maui : $8,500.
The look on everyone's
face when they see the 8x10 glossy of the bride making love to the best man:
There are some
things money can't buy, for everything else there's MASTERCARD
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