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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 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.

But 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:

2. BlackRock issues standard "touchy-feely" statement. BlackRock is a huge issuer of ARPs. Yesterday it said it was doing something:

BlackRock’s 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)--BlackRock’s 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 outstanding.

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 BlackRock’s top priority. It is the firm’s 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 BlackRock’s efforts.

BlackRock believes, 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 BlackRock’s 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

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."

The plaintiff 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 witness fees.

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.

4. Financial 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 in ARS.

By Friday, five firms offering closed-end funds—Aberdeen Asset Management, Eaton Vance, Nuveen Investments, ING Clarion Real Estate Securities and Gabelli Funds—had 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.

Collectively, 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 market—which totals $63 billion, according to Jeffrey Rosenberg, head of credit strategy at Banc of America Securities.

“We all 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.

Auction-rate 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.

For instance, only three funds—with a combined $1.6 billion in APS—out 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.

Furthermore, said Mr. Isaac, the three funds—Tax-Advantaged Dividend Income, Tax-Advantaged Global Dividend Income and Tax-Advantaged Global Dividend Opportunities—were 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 leverage—which has increased due to this historic turmoil in the auction-rate market—by 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 a statement.

Aberdeen Global Income Fund, which is run by Aberdeen Asset Management, was the first fund to announce it was buying back its APS, on March 7.

While these 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.

“Maybe 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:

SEC Staff 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.

There should 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.

Municipal auction 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 rate.

The no-action 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 staff’s views on the circumstances under which participating dealers may accept bids from issuers desiring to participate in auctions.

Regarding disclosure, 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 in it.

Tennis 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.

This story is probably apocryphal. But who cares?
This is a story about a big 300-guest wedding that took place at Clemson University.

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 their envelope.

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?

Elegant wedding reception for 300 family members and friends: $32,000.

Wedding photographs commemorating the Occasion: $3,000

Deluxe two-week 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: Priceless.

There are some things money can't buy, for everything else there's MASTERCARD

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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