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Harry Newton's In Search of The Perfect Investment Technology Investor. Auction Rate Securities. Auction Rate Preferreds.

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8:30 AM EST Thursday, March 13, 2008: Latest aucton rate securities news. From Bloomberg this morning:

SEC May Let Borrowers Bid on Auction-Rate Securities (Update2)

March 12 (Bloomberg) -- The U.S. Securities and Exchange Commission may let borrowers bid on their own auction-rate securities amid a surge in failed auctions that have increased debt costs for state and local governments.

The SEC is preparing ``guidance'' allowing borrowers to participate in auctions as long as they disclose ``price and quantity'' information about their bids, Erik Sirri, who heads the agency's trading and markets division, said in congressional testimony today. The SEC expects to release the directive by the end of the week, he said.

``The guidance should remove any hesitancy on the part of broker dealers and auction agents to allow municipal issuers to bid,'' Sirri told members of the House Financial Services Committee in Washington.

Potential credit downgrades of companies that insure the debt has scared off investors and led bankers to stop buying unwanted securities, triggering failed auctions. Rates on $100 million of Port Authority of New York and New Jersey bonds rose to 20 percent on Feb. 13, from 4.3 percent a week earlier.

Interest rates on auction-rate bonds are determined by bidding that typically occurs every seven, 28 or 35 days. Brokers at Goldman Sachs Group Inc., Citigroup Inc. and other banks began permitting failures last month amid concerns that potential downgrades of MBIA Inc. and Ambac Financial Group Inc. would hurt the rankings of bonds the companies insure.

Recent Failed Auctions

From 1984 through 2006, only 13 auctions failed as brokers stepped in to buy the bonds when demand was weak. The total value of bonds involved in recent failed auctions may exceed $80 billion, Sirri said.

When auctions fail, bondholders are left holding the securities and interest rates reset at a level spelled out in statements issued at the initial bond sale. Investors can't sell the bonds until there is a successful auction.

Borrowers in the $330 billion municipal-debt market pay banks to issue auction bonds and pay annual fees of 0.25 percent of the outstanding obligation to run the auctions and remarket the debt. Banks are paid even when auctions fail.

U.S. Senator Charles Schumer, a New York Democrat, last week joined a growing list of lawmakers urging regulators to let borrowers bid on their own bonds. A Feb. 28 letter from four members of the House Financial Services Committee, including chairman Barney Frank, said it's ``urgent'' that regulators permit the bidding.

2006 Settlement

The SEC fined Citigroup, Goldman and 13 other banks $13 million in May 2006 after alleging they gave clients information about rival bids in the supposedly blind auctions.

Market participants want SEC assurance that allowing issuer bids wouldn't violate the terms of that settlement, said Anne Phillips Ogilby, an attorney at Ropes & Gray LLP in Boston. She wrote a letter to the SEC last month on behalf of California and Massachusetts hospitals that want to bid on their own bonds to prevent failed auctions.

The settlement ``does not prohibit broker-dealers from bidding for their proprietary accounts when properly disclosed,'' Sirri said today.

Auction failures show the widening impact of the bursting of the U.S. housing bubble, which has caused rising defaults on home loans and threatened bond insurers that guaranteed structured securities tied to mortgages. The subprime-mortgage crisis has cost financial companies almost $190 billion in asset writedowns and credit losses since the beginning of 2007.

From The Bond Buyer this morning;

SEC Plans ARS Guidance by Friday

WASHINGTON - The Securities and Exchange Commission hopes to issue guidance by Friday that will allow issuers to bid on their own auction-rate securities with "appropriate disclosures and in compliance with certain other conditions," Erik Sirri, the SEC's director of markets and trading, told members of the House Financial Services Committee yesterday.

"This guidance would be designed to clarify that ... municipal issuers can provide liquidity to investors that want to sell their auction-rate securities without triggering market manipulation concerns," Sirri said in testimony at a hearing on the turmoil in the municipal market. "This may also have the secondary effect of easing substantially the financial burden on municipal issuers and conduit borrowers from unusually high interest rates. It also should facilitate an orderly exit from this market by municipal issuers and conduit borrowers who seek to do so."

The forthcoming guidance will require issuers and conduit borrowers that want to bid on their bonds to disclose "certain facts related to price and quantity." It will also instruct broker-dealers that they can accept such bids without violating a 2006 enforcement settlement with the SEC over disclosure failures in the auction-rate securities market.

The guidance comes as the commission has received several requests to consider ways to assist issuers, Sirri said. Last month, the leadership of the committee asked the SEC to clarify for the markets as quickly as possible that issuers can participate in auctions for their own securities without running afoul of the securities laws, provided such bidding is allowed by the bond documents. The Securities Industry and Financial Markets Association and other market participants have sent similar letters.

Speaking to reporters at a break in the hearing, Sirri said that the SEC guidance does not come in response to any particular letter. Commission officials, he said, are responding to the auction-rate environment as they see it. He added that the guidance will likely be disseminated through the broker-dealer community.

Meanwhile, Sirri suggested that it is unlikely that the commission will alter its Rule 2a-7, which currently restricts the types of securities that can be purchased by money-market funds. To comply with the rule, money market funds are generally limited to securities that have long-term ratings of double-A or higher. In light of the downgrades to bond insurers, numerous market participants - including some who testified yesterday - support altering the rule to allow to take into account the different municipal and corporate rating scales.

"It is notable that despite the current liquidity crisis, money market funds and their sponsors have not asked the commission for any changes to the risk-limiting conditions of Rule 2A-7, including the credit rating floor," Sirri said.

However, preferred shareholders of closed-end funds have begun to contact the SEC for relief from failed auctions, Sirri said. The guidance on auction-rate securities that the commission is expected to issue later this week may not extend to the closed-end funds, he said, adding: "The division of investment management continues to assess request for guidance ... and to monitor the developments in this area closely."

From a reader:

I just found Blogging Stocks. It is really good - lots of info and people on it with ARPS ...SEC contacts etc. Click here.

From Reuters comes this story of an ING fund redeemption:

ING funds to redeem $240 mln of preferred shares

BOSTON, March 12 (Reuters) - Dutch financial group ING said on Wednesday two of its U.S. closed-end funds will redeem $240 million of auction-rate preferred shares issued by them, extending the list of firms repurchasing these securities that have been rendered illiquid by the credit crisis.

ING said in a statement the redemptions of the preferred shares of the two real estate-focused funds will be funded with existing cash and debt borrowings. The redemptions account for 22 percent and 33 percent of the outstanding preferred shares issued by these funds, it said.

"The interest rate on the debt is equal to or less than the current rates on the auction-rate preferred shares," it said.

Closed-end funds, which issue a fixed number of common shares and trade like stocks on exchanges, have for about two decades issued preferred shares in order to borrow and boost their returns.

The preferred shares are traded at auctions but buyers have stayed away from these auctions over the past month due to the credit crisis. Holders of these shares have since been putting pressure on closed-end fund issuers to repurchase them.

Companies have been yielding to the pressure. Over the past week, Nuveen Investments, Eaton Vance Corp and Aberdeen Asset Management have said they will redeem various amounts of preferred shares they have issued.

You can read the entire ING press release. Click here.

From Van Kampen comes this press release yesterday:

Van Kampen Holds Auction Rate Preferred Shares Conference Call

CHICAGO--(BUSINESS WIRE)--Van Kampen Funds Inc., a subsidiary of Van Kampen Investments Inc. (“Van Kampen”), will hold a conference call on Friday, March 14, 2008 at 1:00 p.m. Eastern Time with Senior Management to discuss recent developments in the auction rate securities markets affecting Van Kampen closed-end funds.

The call is open to the general public. The U.S. domestic call-in number is (866) 837-9780.

As the Auction Rate Preferred marketplace continues to experience unprecedented lack of liquidity, Van Kampen is working with other market participants on finding ways to restore liquidity to this market. Even though we cannot offer a timeline for a resolution to the liquidity situation, Van Kampen will discuss the current status of the ARPS market and potential solutions that the industry is considering with financial advisors and their clients.

Van Kampen Asset Management, the Fund’s investment adviser, is a wholly owned subsidiary of Van Kampen. Van Kampen is one of the nation’s largest investment management companies, with approximately $122 billion in assets under management or supervision, as of December 31, 2007. With roots in money management dating back to 1927, Van Kampen has helped nearly four generations of investors achieve their financial goals. For more information, visit Van Kampen’s website at

Investing in closed-end funds involves risk and it is possible to lose money on any closed-end fund investment.

From today's Wall Street Journal:

Credit Crunch Hits Madison Dearborn
Nuveen Funds Forced To Refinance Securities

When private-equity firm Madison Dearborn Partners LLC paid $6.3 billion to buy Nuveen Investments last year, one key attraction was the investment company's lucrative leveraged closed-end fund business.

But the credit crunch has squeezed that business, making it more expensive for Nuveen to borrow, which could lower profit and limit growth. Yesterday, Nuveen bowed to pressure from investors and steadily rising interest rates on its funds' debt and arranged to refinance "a substantial portion" of $4.3 billion of so-called auction-rate securities issued by its funds.

While the entire buyout industry has been hit by the credit crunch because funding to do deals has dried up, Madison Dearborn is the latest buyout shop to be sideswiped in an unexpected way. In recent weeks, private-equity firms Carlyle Group and Kohlberg Kravis Roberts & Co. have each had a publicly traded affiliate struggle with investments in debt securities.

It is unclear what price Nuveen will pay to borrow that money, but without low borrowing costs, the profits it makes for shareholders by adding leverage to its funds could diminish. In a conference call, Nuveen officials said they were working hard to resolve the auction-rate-securities problem as quickly as possible. "Our primary goal is to reduce the funds' current relative costs of leverage, bringing those costs more in line with historical norms," Bill Adams, an executive vice president at Nuveen, said in a news release.

Madison Dearborn is also getting hit close to home. Both it and Nuveen are big players in Chicago's tight-knit financial community, and Madison Dearborn went outside its standard playbook to do the deal, which was the largest buyout of a money-management company.

Traditionally, Madison had bought small companies and removed obstacles to help them grow. Nuveen was slightly different. It was financially sound, growing rapidly, and regarded as well-managed. Last year, however, Madison started raising a $10 billion fund, which would put it in the same league as bigger players like Bain Capital and Providence Equity Partners.

The purchase represented a 20% premium for Nuveen shares. According to investment bank Putnam Lovell, the Madison-led group of buyers paid 18 times trailing earnings before interest, taxes, depreciation and amortization for Nuveen. The deal was twice the norm for such a purchase by some estimates.

Nuveen recently managed about $165 billion, including more than $50 billion in closed-end funds and $20 billion in mutual funds. It is the biggest player in the U.S. closed-end fund world, with 120 different bond and stock funds.

The closed-end funds can be quite profitable, and are attractive to investors because their managers use leverage to boost returns. To get low-priced debt, Nuveen and others used auction-rate securities, which are long-term debt on which interest resets frequently.

However, the auction-rate market seized up last month as part of the credit crunch. That has resulted in funds operated by Nuveen and others paying higher rates. Yesterday, Nuveen said it had secured new financing to redeem some of its auction-rate securities. Nuveen didn't specify the cost of the new financing.

Earlier, two other fund operators, Eaton Vance Corp. and Aberdeen Asset Management, announced similar measures to redeem some auction-rate securities.

Even if Nuveen redeems the entire $4.3 billion, its problems in the auction-rate market are far from over. It has another $11 billion in these securities outstanding for its municipal-bond funds, and Nuveen expects it will "take considerably longer to refinance" them.

Moody's Investors Service recently changed the credit-rating outlook on Nuveen to "negative" from "stable" amid such challenges. In changing its outlook on Nuveen, Moody's considered risks like the potential for permanent loss of assets under management and earnings due to a need to retire or replace auction securities, as well as negative net flows across stock products.

Madison is hoping that Nuveen's problems in closed-end funds won't significantly affect the fund company's bottom line, and has plenty of other portfolio companies to buffer the private-equity firm should such troubles emerge. Nuveen units Tradewinds Global Investors LLC and NWQ Investment Management, which manage other investment products, have meanwhile had strong performances.

Still, the problems could make it challenging to launch new products, especially in closed-end funds, and may take management attention away from other strategic options for now, like potential acquisitions.

Nuveen is likely "not going to grow" much this year, says Moody's analyst Matthew Noll. That could mean "the hurdles Nuveen must jump over to achieve the valuation that Madison wants" if they decide to eventually sell could be higher, he says.

For its part, Nuveen stayed upbeat. "At times when the market is challenging, it's most important" to have the long-term view that Madison Dearborn has provided, said Alan Berkshire, senior executive vice president at Nuveen, in an interview.

From Gabelli comes this press release:

The Gabelli Convertible and Income Securities Fund Inc. to Redeem Auction Rate Preferred Stock

RYE, N.Y.--(BUSINESS WIRE)--The Board of Directors of The Gabelli Convertible and Income Securities Fund Inc. (NYSE:GCV) has authorized the filing of a shelf registration of up to $100 million in preferred stock or debt securities. The registration process typically takes approximately one to two months. Upon its completion the Fund will have additional flexibility to take steps toward resolving the illiquidity that has occurred for holders of the Fund's auction rate preferred stock.

The Board of Directors has agreed in principle to the redemption of the Fund's auction rate preferred stock once the shelf registration is declared effective.

The Fund currently has approximately $50 million of preferred stock outstanding, $25 million of which is auction rate preferred stock.

This press release does not constitute an offer of any securities for sale.

The Gabelli Convertible and Income Securities Fund Inc. is a diversified, closed-end management investment company with $144 million in total assets whose primary investment objective is to seek a high level of total return through a combination of current income and capital appreciation. The Fund is managed by Gabelli Funds, LLC, a subsidiary of GAMCO Investors, Inc. (NYSE:GBL), which is a publicly traded NYSE listed company.

From Dow Jones news service:

3rd UPDATE: Nuveen To Refinance Some Auction-Rate Preferreds

By Daisy Maxey

Nuveen Investments Inc., joining the small group of fund managers that is bringing new hope to at least some holders of auction-rate preferred securities, said Wednesday it has arranged new debt financing for a portion of its taxable closed-end funds' preferred shares.
However, Nuveen has not yet come to a solution for preferred shareholders of its municipal closed-end bond funds, though it said it's aggressively pursuing solutions, including a new form of preferred stock that could be purchased by money-market funds. Preferred shareholders in muni funds far outnumber shareholders in taxable funds at Nuveen and in the industry.

The Chicago asset manager said it intends to begin announcing refinancings for auction-rate preferred shares for specific taxable funds by the end of March. It will replace the current leverage with various forms of debt and other leverage.
The firm said it plans to restore liquidity at par for preferred shareholders and is seeking to reduce the relative cost of leverage for its common shareholders as well.

Nuveen has lined up financing arrangements "for a substantial portion" of its taxable funds, Bill Adams, executive vice president of Nuveen's closed-end fund team, said in an interview Wednesday. Adams couldn't say how many funds for which the company has lined up financing, but said "the intent is to refinance all" of the auction-rate preferreds for its taxable and municipal closed-end funds, though it will start with its taxable funds first.

Some 100 of Nuveen's 120 closed-end funds are leveraged with $15.4 billion in auction-rate preferred shares outstanding. Of those 100 funds, 13 are taxable funds with $4.3 billion in auction-rate preferred shares outstanding, and 87 are municipal bond funds with $11.1 billion in outstanding auction-rate preferreds.

The company hopes to announce specific taxable funds for which the preferred shares will be refinanced over the next few weeks, and to have that process completed within four to six months, depending on market conditions, Adams said. It will use strategies like having the funds issue commercial paper or borrow directly from banks, something its taxable funds already do, he said.

"It's a matter of going to the financial institutions and getting capacity in terms of the amount of lending that they're willing to do with various funds...," he said.

Nuveen's announcement is tangible proof of just how seriously the industry is taking this issue, said Cecilia Gondor, executive vice president of Thomas J. Herzfeld Advisors, a closed-end fund specialist. "Fund groups mobilized early to tackle this crisis and have left no stone unturned..."

In recent months, investors in auction-rate securities, preferred stock or debt instruments with rates that are periodically reset at auction, have found themselves trapped in the investments, which many had viewed as cash alternatives. These securities are issued by municipalities and other tax-exempt institutions in addition to closed-end funds. When the auctions failed, investors were unable to sell the shares, but were paid a higher, penalty rate of interest.

Closed-end funds have issued more than $60 billion in auction-rate preferred securities. Investors in these preferred shares are particularly hard hit because while interest rates on these shares moved up as auctions failed, they didn't jump up as much as interest rates paid to holders of some other auction-rate debt.

On Friday, Aberdeen Asset Management Inc. said it would redeem $30 million of outstanding auction-rate preferred securities and replace them with loans, and Eaton Vance said Monday that it would redeem the outstanding auction-rate preferred shares of three of taxable closed-end equity funds, switching it to debt.

In doing so, both companies have created an avenue for investors in the preferreds to sell their shares.

Nuveen also has been working with banking partners to develop a new form of preferred stock that includes a put feature, a variable rate demand preferred, which would be eligible for purchase by taxable and tax-exempt money-market funds.

The firm believes that these preferreds would be the best solution for refinancing the preferreds of its muni funds and is in discussions with market participants that could provide put commitments for the new preferreds, Adams said. "We believe that it's an idea that has significant merit as a potential solution," he said.

Its success will depend, in part, on the acceptance of these new preferreds by money-market funds, Adams said. Until the firm completes a transaction, "We really can't be certain whether that's going to be a viable alternative to refinancing all the municipal auction-rate preferreds," he said.

If that solution prove workable, Nuveen hopes to have an initial transaction or set of transactions done in a couple of months, Adams said. It then would move to refinance the rest of the funds, but he cautioned that "it may take longer than for the taxable funds, just due to the sheer number of municipal funds."

If the money-market preferreds do not prove workable, other approaches could work on a temporary basis for Nuveen's municipal funds, Adams said. Those include the use of debt leverage. "That can work especially in an environment where interest rates are lower or declining," though it's not the optimal approach, he said.

Nuveen also could consider the potential use of tender option bonds from certain muni bond funds' portfolios, derivative securities created from fixed-rate bonds through a trust arrangement that effectively creates financial leverage within a bond portfolio. They have a put-like feature that makes them money-market fund eligible. However, their creation would be limited by the availability of eligible municipal bonds from which to create them among other factors, Nuveen said.

The firm's primary objective is to employ the variable rate demand preferreds, which would "have applications for the taxable funds as well," Adams said.

The timing of any funds' refinancing will depend on the nature of its portfolio, its leverage structure, the cost of the financing arrangement, the ability to obtain sufficient credit and put-provider capacity, among other factors, Adams said on a conference call Nuveen held Wednesday.

Asked if the refinancings will occur before income-tax deadlines loom, he said, it would be "very challenging to guarantee that we would have any fund that would have completed refinancing in that timeframe."

All of the firm's efforts will be subject to market conditions, Adams said. He emphasized that the credit quality of the funds' holdings is high and that the preferreds are backed by significant asset coverage, but noted that in the current financial environment, credit, even to strong creditors "is challenging."

Nuveen went private in November after being acquired by a group of private investors led by Madison Dearborn Capital Partners Inc.

Implications from all this:

1. The issuers are stepping up to the plate. But your letters and emails are still needed. Keep sending them. Our pressure is working.

2. Our money looks safe.

3. Getting it back will take time. I'm guessing in some cases as long as a year.

4. Meantime, we are receiving dividends. Some of us are getting tax-free monies. In most cases, these dividends look better than what you can earn in the stockmarket -- although I still love gold, silver, oil, commodiities, and Australian mining stocks. I notice that gold just touched $1,000 an ounce. More about them tomorrow.

5. Only borrow from your broker or bank IF the terms of your loan include the provision that your loan repayment will happen as your ARPs are redeemed for cash.

6. As I've said all along, it's too early for lawyers.

Still in California on "vacation." I'm enjoying it more as I feel better about my ARPs.

Nine words the ladies use. A Man's Guide to a New Language.

1. Fine: This is the word women use to end an argument when they are right and you need to shut up.

2. Five Minutes: If she is getting dressed, this means a half an hour. Five minutes is only five minutes if you have just been given five more minutes to watch the game before helping around the house.

3. Nothing: This is the calm before the storm. This means something, and you should be on your toes. Arguments that begin with nothing usually end in fine.

4. Go Ahead: This is a dare, not permission. Don't Do It!

5. Loud Sigh: This is actually a word, but is a non-verbal statement often misunderstood by men. A loud sigh means she thinks you are an idiot and wonders why she is wasting her time standing here and arguing with you about nothing. (Refer back to #3 for the meaning of nothing.)

6. That's Okay: This is one of the most dangerous statements a woman can make to a man. That's okay means she wants to think long and hard before deciding how and when you will pay for your mistake.

7. Thanks: A woman is thanking you, do not question, or faint. Just say you're welcome.

8 . Whatever: A woman's way of saying Drop Dead, or stronger words.

9. Don't worry about it, I got it : Another dangerous statement, meaning this is something that a woman has told a man to do several times, but is now doing it herself. This will later result in a man asking "What's wrong?" For the woman's response refer to #3.

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. I make my daily column -- Monday through Friday -- freely available for three reasons: Writing is good for sorting things out in my brain. Second, the column is research for a book I'm writing called "In Search of the Perfect Investment." Third, I encourage my readers to send me their ideas, concerns and experiences. That way we can all learn together. My email address is . You can't click on my email address. You have to re-type it . This protects me from software scanning the Internet for email addresses to spam. I have no role in choosing the Google ads on this site. Thus I cannot endorse, though some look interesting. If you click on a link, Google may send me money. Please note I'm not suggesting you do. That money, if there is any, may help pay Michael's business school tuition. Read more about Google AdSense, click here and here.

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