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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 long.

A 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.

Another 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 Seattle Times.

Auction-rate securities not as safe as they used to be by Drew Silver

Neal Koblitz 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.

Auction-rate 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 how: Investors put their money into "auction-rate securities" to get a higher interest rate than savings accounts. Neal Koblitz put in $200,000. Borrowers sold such securities, paying less interest than with ordinary long-term debt. Valley Medical Center sold $170 million worth to fund an expansion. Investment 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. When things went well, as they did for more than 20 years, most people considered the securities almost as safe as cash. But when the mortgage market collapsed the bond insurers that backed the securities were hit hard. Starting late last year, fewer investors bid in the weekly auctions. The investment banks, burdened by their own busted mortgage investments, stayed out as well. Auction failures peaked about a month ago. With no buyers for their securities, investors can't get their money out. Borrowers 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" account.

The account 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.

Auction-rate 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.

"It was 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.

"Nobody 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."

And borrowers 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.

Wall Street 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.

The auctions 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 services.

Auction-rate 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.

Donna Fincke, 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.

Other auction-rate borrowers in Washington include Energy Northwest, Gonzaga University, the Seattle-based Student Loan Finance Association and the Chelan County Public Utility District.

Auction-rate 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 than buyers.

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."

Historically, 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 default.

Earlier this 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.

The failure 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 failed auctions.

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.

"Never 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.)

Darcy Donahoe-Wilmot, 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.

"You basically have to wait for the next auction," she said. "You just have to wait it out."

But waiting 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.

PeaceHealth, 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.

"Our credit 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.

PeaceHealth 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 the demand.

Valley Medical 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 3.75 percent.

And Koblitz? 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 earning.

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.

"It would 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 banking system."

Koblitz owns 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.

Executives at 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.

"We are 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."

News from Friday, in case you missed it:
I 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.

The "hurt" is spreading through the economy. Follow old advice: When in doubt, stay out.

Auction 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 Palm’s 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:

"The (holders of) auction rate preferreds will not lose any of their money."

"If all the (possible) financing solutions fail, we'll deleverage."

Other statements included:

"We're 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."

"We'll have a solution in the near future." We don't know when the near future is.

"It's important to communicate."

"Our ARPs holders are getting paid to wait."

"Refinancing 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?
Answer: Piecemeal.

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."

Personal emails from fellow sufferers. From Susan:

Harry,
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!

Susan

From Todd:

Harry,
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.

From Tom

Hello,
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.

The silence 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.

You aren't the only person being screwed: This is amazing. Wall Street gets paid, while we get screwed.

Goldman, 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.

Citigroup Inc., 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 state.

``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.

Banks covered 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.

"These failed auctions were not caused by these banks, but by systemic problems within this market beyond their control,'' he said.

A spokeswoman 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.

Seven-day auction 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.

Anderson said 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. 12.

"Contracts 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.

After auctions 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.

Subprime 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 here.

The technology of gubnatorial politics
Question: How do you slow down a prostitute?

Answer: You put a Governor on her.

The 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, “don’t worry about a thing. He really does have a bump on his head. About halfway into the operation we ran out of anesthetic.”

The technology of time
Question: What time do Chinese people go to the dentist?

Answer: When it's two thirty.

....you get it... tooth hurty....

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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