Harry Newton's In Search of The Perfect Investment
Technology Investor. Auction Rate Securities. Auction Rate Preferreds.
8:30 AM EST Monday, March 24, 2008: Bernanke
and Paulson saved Bear Stearns because they thought the world would collapse.
Somebody sold them on that wondrous piece of information. It's time to sell
them on the auction rates failed disaster. We have $360 billion of real
money tied up that can't be used to buy houses, businesses, cars, pay college
fees, fund retirement, etc. $360 billion is a lot of money to remove from the
economy. It's far less than Bush's stimulus package, which is only $117 billion.
Send your letters. Contact your Congresspeople. This is dragging on far too
little good news. Todd Henderson writes,
The SEC Enforcement
Division has now set up its official email conduit and is welcoming everyone
currently injured by ARS to email a detailed written complaint.
Here is the
email address for official complaint. ENF-ARScomplaints@sec.gov
They want to know:
-who your brokerage
and financial advisor were
-when this happened
-exactly what you were told and what you asked
how these were described to you--ie why and how you were led to believe this
was always liquid no risk to principal
-whether you ever saw a prospectus or anything in writing regarding risk
-whether you received any verbal information regarding risk
-how the account was described on your statement or application for account
(cash equivalent, money market, 7 day paper, etc.)
-any communication (or LACK thereof) from your brokerage clarifying what your
investment was subsequent to the opening of the account to the present or
any warning that it was "imperiled"
-anything you think your brokerage might be relying on as a written defense,
and why it didn't give you meaningful understanding of your investment given
what the brokerage actually told you.
(I asked enforcement
whether to go through this channel or through Steve VanMeter, whom Charles
Rohrer mentions above. They said Mr. Van Meter is in the Investment Management
Department; they are the Enforcement Department, it will eventually become
part of the same file. But right now Enforcement has set up this written "hotline"
specifically for this purpose.
class action suit filed: This one by Girard Gibbs LLP in San Francisco.
The partner in charge is Aaron M. Sheanin. His phone is (415) 981-4800 and his
email address is AMS@girardgibbs.com.
You can read the suit here. Click
here. They're the same company who filed against Deutsche Bank, Wachovia
and TD Ameritrade.
I remain convinced
that the only way to get this situation resolved quickly is to keep the pressure
up. Important: Get your local newspapers involved: Here's a story from The
securities not as safe as they used to be by Drew Silver
holds the monthly statement from his account, which is frozen because
of the near collapse of the auction-rate securities market. Koblitz can't
get at his $200,000, though he's been assured it's still there.
securities:How they work and don't work
EVEN IN THIS AGE of serial financial meltdowns, it's uncommon for a
crisis to hit lenders and borrowers at the same time. But the freeze-up
of the market for auction-rate securities has done just that. Here's
put their money into "auction-rate securities" to get a higher
interest rate than savings accounts. Neal Koblitz put in $200,000.
sold such securities, paying less interest than with ordinary long-term
debt. Valley Medical Center sold $170 million worth to fund an expansion.
bankers ran frequent auctions to reset the interest rate on the
bonds. The auctions also let investors get their cash back by selling
the securities to other investors.
things went well, as they did for more than 20 years, most people
considered the securities almost as safe as cash.
when the mortgage market collapsed the bond insurers that backed
the securities were hit hard.
late last year, fewer investors bid in the weekly auctions. The
investment banks, burdened by their own busted mortgage investments,
stayed out as well.
failures peaked about a month ago. With no buyers for their securities,
investors can't get their money out.
get hit with high "penalty rates" unless they can refinance
their loans which many of them now are scrambling to do.
Last fall, University
of Washington math professor Neal Koblitz and his wife wanted a safe place
to park some money for a few months while they hunted for vacation property.
A financial consultant at their local Washington Mutual branch suggested a
product Koblitz had never heard of before: an "auction-rate securities"
sounded like a good deal, Koblitz recalled: Not only would it pay higher interest
than his existing savings account or a standard money-market account, but
the cash would be available on just seven days' notice.
securities also seemed like the answer for Valley Medical Center in Renton
when it needed to raise money for its new seven-story emergency-services tower.
Attracted by the cheaper rates about one and a half percentage points
below the rates on standard long-term debt the hospital sold $170 million
in such notes in 2005 and 2006.
a good move at the time we made it, with the information we had at the time,"
said Jeannine Grinnell, Valley Medical's vice president for finance. The hospital
saved $2.5 million on interest since 2005.
For more than
20 years, the auction-rate securities market ran quietly and profitably for
thousands of investors and borrowers.
But in the past
few months, this obscure corner of the bond world has seized up like an engine
without oil yet more fallout from the nation's mortgage mess.
With no one
willing to buy their securities, many investors' accounts have been frozen;
Koblitz can't get at his $200,000, though he's been assured it's still there.
knows when it's going to be available," Koblitz said. "I feel like
I'm being forced to make a long-term loan at below-market rates."
have seen their once-low rates skyrocket: Valley Medical's debt shot from
3.75 percent to 15 percent in the space of a week, forcing the hospital to
move quickly to refinance.
alchemists created auction-rate securities in 1984 to blend some of the most
attractive features of long-term and short-term bonds.
The basic idea
is pretty simple: Instead of being fixed for 25 or 30 years, the bonds' interest
rate is reset by periodic auctions, which also give investors the chance to
buy in or sell out.
take place every seven, 28 or 35 days, depending on the security; the investment
banks that package the securities and run the auctions earn fees for their
securities have grown into an estimated $330 billion market. Roughly half
that amount is issued by municipalities and quasi-public entities hospitals,
utility districts, colleges and the like.
The rest comes
from businesses, including student-loan companies and closed-end mutual funds.
executive director of the Washington Health Care Facilities Authority, said
that since 2000 her agency has issued $1.9 billion in auction-rate debt on
behalf of 11 hospitals and health-care providers in the state from
Children's Hospital & Regional Medical Center and the Fred Hutchinson
Cancer Research Center to Grays Harbor Community Hospital in Aberdeen.
borrowers in Washington include Energy Northwest, Gonzaga University, the
Seattle-based Student Loan Finance Association and the Chelan County Public
securities were marketed as safe for both investors and issuers, and until
recently few people would have had reason to disagree. Between 1984 and 2006,
according to Moody's, only 13 auctions failed, meaning there were more sellers
There was some
fine print saying that if an auction failed, investors wouldn't be able to
get their money out until the next successful auction, and borrowers would
have to pay a high "penalty rate."
however, if an auction seemed about to fail, the investment banks managing
it would step in to buy the securities themselves.
But that was
before the near-collapse of the U.S. mortgage sector last summer. The mortgage
mess has eroded the strength of dozens of financial-services companies
including the big investment banks and the companies that insure bonds against
year, as several big bond insurers teetered on the brink of insolvency, investors
began shying away from the securities they backed. Investment banks, increasingly
worried about their own health, started letting auctions fail.
rates peaked in mid-February. Unfortunately for Koblitz, that was just when
he wanted to pull his $200,000 out of two auction-rate accounts so he could
close on a 43-acre parcel near Deming in Whatcom County.
On Feb. 12,
Koblitz told WaMu he'd need the money by the scheduled Feb. 21 closing date,
and was assured it would be available. Bank officials repeated that assurance
on Feb. 15, after Koblitz read a newspaper article about the rising tide of
But on Feb.
19, WaMu told Koblitz that the auctions for both his accounts had failed,
and that his money wouldn't be available after all. A week later, they failed
again. And again the week after that.
in my lifetime in fact, not since the Great Depression in the 1930s
had customers been unable to rely on an account set up through their
local bank," Koblitz said. (Though he opened the account at WaMu's University
Village branch, it actually was set up through WaMu's investment division,
meaning deposit insurance doesn't apply.)
a spokeswoman for WaMu, said about 0.05 percent of its investment clients
are invested in auction-rate securities, to the tune of about $50 million.
(She wouldn't give a more precise number, though Koblitz said he was told
WaMu had about 2,000 such accounts.) Those like Koblitz whose accounts are
effectively frozen have few choices.
have to wait for the next auction," she said. "You just have to
wait it out."
can be expensive, for both investors and borrowers. Grinnell, of Valley Medical,
said the jump from 3.75 percent to 15 percent added $320,000 to the hospital's
interest tab. Even after rates fell back a bit, Valley Medical still was paying
north of 10 percent.
the Bellevue-based health-care system, saw the rate on $43.3 million of debt
spike from 3.7 percent Feb. 6 to 15 percent Feb. 13. Four weeks later, it's
still 6.74 percent.
rating is AA, we paid the bond insurer to enhance it to AAA you'd think
we'd be insulated over here in our corner of the bond market," said Roshan
Tarikh, system treasury director for PeaceHealth.
Even so, things
could be worse: One county in Alabama is contemplating bankruptcy as a result
of surging interest costs on its auction-rate debt.
And The Wall
Street Journal reported Friday that several Silicon Valley startups that
parked their venture-capital cash in auction-rate accounts now can't get at
it to fund their growth plans.
is weighing several options for refinancing the debt, either to fixed-rate
bonds or a different form of variable-rate debt.
But that new
variable-rate debt requires a bank letter of credit, and because so many borrowers
are seeking such letters at once, Tarikh said, banks are having trouble meeting
was able to refinance its entire issue of auction-rate debt this past week,
Grinnell said, by bundling it into a separate fixed-rate bond issue that was
almost ready to go out to market.
But the higher
fixed rate, 5.25 percent, will cost Valley Medical about $3 million more a
year in interest payments than if the auction-rate debt had stayed around
He and his wife did buy the Whatcom County property, but only by tapping a
home-equity line of credit at 6.34 percent interest considerably more
than the 4.7-5.4 percent the money frozen in their auction-rate account is
WaMu and the
other banks that sold auction-rate securities, he said, should take the lead
in unclogging the market either by stepping in to buy the securities
no one else seems to want or by leaning on the investment banks or the original
issuers to do so.
be very harmful to WaMu and other banks if people with savings become mistrustful
of all bank accounts," he said, "and start hoarding money in mattresses
or buying gold or doing whatever people do when they lose confidence in the
auction-rate preferred shares, or ARPs, issued by two mutual-fund companies.
The rates on those securities, as it happens, are capped at relatively low
levels, making it even harder to find buyers for them at auction.
one of the companies, Van Kampen, said in a teleconference Friday that they're
looking at several options to unstick securities, including refinancing them
or converting them to a more liquid form of variable debt.
working diligently and aggressively toward a solution to this problem
a solution that is in the interest of all our (ARP) shareholders," said
Van Kampen managing director Mike Spangler.
But, he added,
"There is no timetable at this point for a resolution."
from Friday, in case you missed it:
dumped my silver and gold yesterday. It will skyrocket today, no doubt. God
knows where you find "safe havens" these days. I'm suggesting to Sealy
that their mattresses, in future, come with zippered pockets.
"hurt" is spreading through the economy. Follow old advice: When
in doubt, stay out.
Rate Securities (Update) from Thursday (reported on Friday):
+ I hear one in
five of Silicon Valley's technology companies is stuck with ARPs. Palm, which
is losing money, has $74.7 million of them and is talking about "reclassifying"
them on its balance sheet. Palm is completing "an impairment analysis"
and expects to record an impairment charge that will be made available in Palms
upcoming quarterly report. I listened to the conference call. There was only
one question on ARPs. I learned nothing. And the analysts on the call didn't
seem to be interested in the $74.7 million. Palm said it could survive without
the $74.7 million. You can hear a replay of the call on 888.286.8010
(domestic) and 617.801.6888 (international), passcode 88825488.
I wouldn't bother.
Boy, are these conference calls stacked! Calamos had a touchy-feely
conference call to talk about redeeming its ARPs. It took two "questions"
from Wachovia people, both of which included effusive compliments for Calamos
management. I'm guessing those Wachovia people were brokers who's made money
selling the Calamos ARPs. While Calamos management was touchy feely, they did
include two positive statements:
of) auction rate preferreds will not lose any of their money."
"If all the (possible) financing solutions fail, we'll deleverage."
working diligently to find new financing options. We'll report to you soon."
" These are trying times. We're doing everything possible to refinance
the (ARPs) debt."
have a solution in the near future." We don't know when the near future
holders are getting paid to wait."
is the best option. Very strange market. Strangest I've seen. Cost of leverage
should not be onerous."
Q: How soon
the "near future" is?
One man from Wachovia
got on the conference call and said he "had no sympathy for the
auction rate preferreds. They should have known what they were buying all along.
So let them stew."
emails from fellow sufferers. From Susan:
I wanted to thank you for your column regarding the Auction Rate Securities.
I've read some blogs and learned a lot. Your column, however, just seems a
little friendlier as everyone in the blog is so angry -- and so am I -- and
seem so much more knowledgeable than I am about stocks, but apparently it's
taking quite a toll on me. I wake up, go right to my computer, hit CNBC, Bloomberg,
your column -- and I guess you could say I've become obsessed about these
ARSs. I didn't even really know what they were a couple months ago.
I'm just a mom with three kids and a dog, not a big-time investor. My portfolio
has me down as "Conservative." My dad left me small inheritance
which I had put in UBS, got nervous with the crazy market and sold a lot of
it to have safe cash available. My financial investor suggested the ARS's,
same as cash, you know the rest of the story. My advisor seems to be shocked
this could happen. "Unprecedented" is a word I constantly hear.
I just feel so tricked, like such a sucker, and ashamed is a word that comes
to mind. This was money for college, retirement, etc., No one I know would
be aware of these ARSs, kind of feel alone in this mess, so my new websites
have been so important to me.
Thanks for your column and also the tennis updates. Luckily we're getting
into tennis season in where I live and I'm on a tennis team that helps me
to forget about all of this for a little while!
This situation has actually made me physically ill. I am a person of modest
income, and what I have in the Nuveen ARPs related fund represents a huge
amount of my total savings. I get sick to my stomach every time I think about
the lies that I was told, not just by my broker, but by Nuveen as well.
We are also victims of this fraud.
We are conservative
small investors and I considered myself fairly knowledgeable. We would ordinarily
never consider a new investment without checking all the angles. However as
we were accumulating cash for upcoming renovations, keeping it in a money
market fund or CDs, our broker at Merrill said, why not get a little more
interest in a way that is completely safe and liquid? The words "auction
rate" were never mentioned. Somehow the alarm bells never went off. Now
we can't get at that money and have no idea when it will be unfrozen.
We have lost
all trust in Merrill, although we think our broker was taken by surprise also.
We are reducing our exposure to Merrill ASAP.
Ironically I always thought it was worth paying the fees Merrill charges to
get the safety of such a large, established institution.
Our ARS are Blackrock, partly owned by Merrill, and nobody is offering anything
but platitudes. Don't they care about their future with clients like us? Our
broker says he has 100 clients in the same boat.
of the media is driving me crazy! Can tens of thousands of Americans have
their assets frozen with no outcry? Do I have to picket the Merrill HQ? I've
been speaking with the offices of Sen Kerry and Kennedy and they don't know
what's going on either.
It seems to
me that the most effective thing right now would be to get the victims speaking
up and the ARS fraud on the headlines. If you have any ideas about how to
do that it would be great.
aren't the only person being screwed: This
is amazing. Wall Street gets paid, while we get screwed.
Citi Get Fees for Failed New York Auction-Rate Bonds
March 24 (Bloomberg)
-- New York paid 10 securities firms more than $600,000 since mid-February
to handle bids for auction-bonds even though the sales failed, saddling the
state with penalty interest rates.
Goldman Sachs Group Inc. and eight more firms receive $10 million a year to
oversee periodic bidding that sets rates on about $4 billion of auction bonds.
When there aren't enough buyers, the yields rise. A total of 188 of the state's
201 auctions since Feb. 12 have failed, according to data supplied by the
``We are contractually
obligated to pay these fees regardless of whether the auction fails, and we
will fulfill our commitment,'' Matt Anderson, a spokesman for New York's Division
of Budget said in an e-mailed statement.
State and local
governments pay almost $8 million a week in fees to banks for auctions-rate
bonds, based on standard fees. About two-thirds of auctions in the $330 billion
market have failed since mid-February, including periodic sales of preferred
stock for closed-end bond funds, the Bloomberg data show. Securities firms
are receiving the same fee even when investors who wanted to sell are unable
to do so because bankers haven't found enough bidders.
shortfalls in demand at auctions in the $330 billion market buy purchasing
bonds for their own account, even though they weren't obliged to. They didn't
tell investors or issuers about the extent of the activity, which was one
of the practices cited by the Securities and Exchange Commission in 2006 when
it fined 15 banks a total of $13 million for bid- rigging.
New York isn't
trying to renegotiate the contracts with the 10 broker-dealers it uses for
auction bonds, Anderson said. The firms also include Bank of America Corp.,
Wachovia Corp., UBS AG, JPMorgan Chase & Co., Merrill Lynch & Co.,
Bear Stearns Cos. Morgan Stanley and Lehman Brothers Holdings Inc.
failed auctions were not caused by these banks, but by systemic problems within
this market beyond their control,'' he said.
for New York-based Citigroup, Danielle Romero-Apsilos, declined to comment,
as did Michael DuVally, a spokesman for New York-based Goldman. Citigroup
was the biggest underwriter of auction-rate debt from 2000 to 2007, according
to Thomson Financial. Goldman is the most profitable investment bank.
When there aren't
enough bidders in auctions that typically take place every seven, 28 or 35
days, rates get set by formulas spelled out when the debt is issued. In New
York, the penalty rates ranged from 3.59 percent to 5.64 percent in the week
ended March 14. That compares with yields on the variable-rate demand bonds,
an alternative to auction-rate notes, that were less than 3 percent for 27
of 43 issues, according to state data.
rates averaged 5.28 percent on March 12 for borrowers in New York, New Jersey,
California and Massachusetts, up from 3.47 percent on Feb. 6, the last week
before New York auctions began failing, according to index data published
by the Securities Industry and Financial Markets Association.
Before the failures,
auction-rate bonds were a way to sell long-term bonds at money market rates.
They were the least expensive kind of borrowing for New York until demand
began to weaken in September, according to a state report.
copies of the contracts with banks handling the auction bonds weren't available.
Anderson and Ronald Greenberg, a first deputy director of the budget, said
state officials are in daily contact with bankers about auction bonds. He
declined to respond to questions about the shortage of bidders since Feb.
for handling auctions are written by broker dealers and presented to issuers
as part of a negotiated transaction,'' said Joseph Fichera, chief executive
officer of Saber Partners, a New York based adviser to companies and governments.
``They can be terminated or renegotiated, like any contract.''
Fichera, a financial
adviser to the New York State Dormitory Authority, declined to comment on
the state's bonds.
There is precedent
for broker-dealer agreements that don't pay banks a fee when auctions fail.
failed to attract enough bidders in 1990 for bonds of Tucson Electric Power
Co., now a unit of Unisource Energy Corp., Fichera arranged a new contract
that rewarded bankers with a higher fee for selling bonds that resulted in
a lower auction rate, and no fee if bonds sold at the highest permitted rate.
problem explained: John Clarke and Bryan Dawe are an Australian comedy
team. Dressed in suits and looking very serious, they explain the intricacies
of the sub prime mortgage crisis. Two minutes of fun video. Click
technology of gubnatorial politics
Question: How do you slow down a prostitute?
Answer: You put
a Governor on her.
technology of medicine
A man who had come out of a complicated abdominal surgery was complaining of
having a bump on his head and a terrible headache. The nurse, fearing that the
man might be suffering from some post operative shock, spoke to the surgeon
about it. The doctor assured the nurse, dont worry about a thing.
He really does have a bump on his head. About halfway into the operation we
ran out of anesthetic.
technology of time
Question: What time do Chinese people go to the dentist?
Answer: When it's
....you get it...
This column is about my personal search for the perfect
investment. I don't give investment advice. For that you have to be registered
with regulatory authorities, which I am not. I am a reporter and an investor.
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is research for a book I'm writing called "In Search of the Perfect
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