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4:00 PM EST Friday, March 7, 2008: Good news from

Aberdeen Fund to Redeem Auction-Rate Securities (Update3) By Christopher Condon

March 7 (Bloomberg) -- Aberdeen Global Income Fund Inc. plans to buy back all its auction-rate debt, the first closed- end fund to take the step since the market seized up in mid- January.

The fund will redeem $30 million of auction-rate securities known as preferred shares, replacing them with loans from a major financial institution, the fund said today in a statement.

About half of all closed-end funds used the auction-rate market to finance additional investments in government and corporate bonds, a strategy aimed at boosting returns. Auctions began failing as investors fled all but the safest government debt, leaving preferred shareholders with about $60 billion in securities they couldn't sell.

The news may put pressure on other fund managers to buy back auction-rate debt. Many brokers marketed the securities as a short-term investment similar to a money-market fund.

"Its encouraging that Aberdeen has done the right thing,'' said John Dwyer of Duxbury, Massachusetts, who has $650,000 stuck in auction-rate preferred shares. "It's a great model for how all the issuers should behave.'' Dwyer doesn't hold shares in the Aberdeen fund.

The fund, which is managed by Aberdeen Asset Management Inc. of Aberdeen, Scotland, trades at a 12 percent discount to its $127 million in net assets. The stock has returned 9.1 percent annually in the past five years, compared with 12 percent by the Standard & Poor's 500 Index.

Managers including Chicago-based Nuveen Investments Inc. and Boston-based Eaton Vance Corp., have resisted buying back their preferred shares, saying it would hurt their common shareholders. The companies, the largest closed-end fund managers, have said they are in talks with major banks aimed at bringing new liquidity to the market. The companies didn't immediately return phone calls seeking comment.

While Aberdeen is the first fund to announce a redemption, it won't be followed by many others, said Cecilia Gondor of Thomas J. Herzfeld Advisors Inc. in Miami, which specializes in closed-end fund research.

In addition to being a small fund, she said Aberdeen Global had a maximum interest rate, which takes effect when an auction fails, considerably higher than most closed-end funds, giving Aberdeen more incentive to refinance. Other fund managers have said their funds still a higher return from their investments than they pay in interest to preferred shareholders. Aberdeen declined to comment.

Eaton Vance has said it would like to replace its preferred shares with a new form of debt that money-market funds could buy. Money funds are barred from buying securities with maturities longer than 13 months, unless they hold the right to sell back to the issuer at any time.

Joseph Benevento, head of U.S. cash management at Deutsche Bank AG, said he didn't see that plan moving forward.

'Money market funds would require a liquidity facility to be eligible and liquidity does not come cheaply right now,'' he said.

8:30 AM EST Friday, March 7, 2008: This is serious Hunker Down Time. Excluding commodities, everything you can name is down -- from consumer confidence (lowest in five years) to stockmarkets (lowest in two years). Here's Yahoo's gloomy picture of yesterday's stockmarket. Look at the dismal numbers.

Banks are also in serious Hunker Down Time. Major banks are lending to major customers. Business for the most part is proceeding. Marginal credits and shakey new deals are affected but not sound credits. The definition of "marginal" has tightened substantially.

As always, there are serious opportunities around for those of us with cash. (Remember my mantra of the past several months? Cash is King.) One dear friend is buying almost new houses for under $100 a square foot (way under replacement cost) and renting them for $900+ a month to families who have been foreclosed on their houses and need a place to live. This opportunity will expand in coming months as the forecast is for additional drops in the prices of homes. From a recent issue of The New York Times:

Christian Menegatti, lead analyst at RGE Monitor, said the firm predicted more homeowners would walk away from their homes if prices continued to drop, regardless of their financial circumstances. If home prices drop an additional 10 percent, Mr. Menegatti said, 20 million households will owe more than the value of their homes.

“Will everyone walk out?” he said. “No. But there’s been a cultural shift. Buying a house used to be like entering a marriage, a commitment for life. Now, if you see something better, you go back into the dating market.”

When homeowners see houses identical to their own selling for much less than they owe, Mr. Menegatti said, “I wouldn’t be surprised to see five or six million homeowners walk away.

That same article had one statistic that I can't get out of my head:

In the boom market, homeowners took their winnings, withdrawing $800 billion in equity from their homes in 2005 alone, according to RGE Monitor, an online financial research firm.

This $800 billion went into a huge spending spree. No more. That one number is why consumer spending, 75%+ of the U.S. economy, presently sucks.

My friend is very selective about the houses she buys. The house must be in good condition. The area must be good. And she must be able to pay herself a decent rate of return on the net income (rent less expenses). She is not figuring any appreciation on the house or the land into her calculations. .

This is bullish for Apple; bearish for RIMM: Apple is making its iPhone work with Microsoft's Exchange Server. That means that we will no longer need BlackBerries to get to our emails, contacts and calendar. This is a major bummer for Research In Motion, the maker of the BlackBerry. RIM has, in my unhumble opinion, neglected its phones and their software. Apple's iPhone is a much better mobile gadget. RIMM will slide further:

Auction Rate Preferreds (Update): Some tidbits to reports, nothing of substance:

+ From Bloomberg this morning:

Auction Disaster Traps Closed-End-Fund Shareholders by Joe Mysak

March 7 (Bloomberg) -- If you own the preferred shares sold by some closed-end bond funds, you had better prepare to hold them for a while.

The shares have been caught in the freeze-up of the auction-rate securities market.

Since late last year, buyers haven't been showing up to bid on auction-rate paper. The underwriters who used to bid on it in order to keep the market functioning smoothly no longer have the heart, or cash, to do so. That means holders of the paper are stuck with it.

Most municipal-bond issuers have a real incentive to convert their auction securities to fixed or variable-rate paper because failed auctions usually trigger a penalty rate, sometimes in the double digits. No municipal issuer wants to pay 15 percent or 20 percent to borrow money.

Unlike municipalities, the companies that sold auction-rate preferred securities, such as Nuveen Investments Inc., BlackRock Inc. and Eaton Vance Corp., usually don't have such penalties attached. They just pay the rate, based upon a formula, outlined in the original offering prospectus, and even if there is a penalty, it is often capped.

Translation: You're stuck. The companies that originally sold this stuff have no obligation to redeem it. And the dealers who made the sale -- often in the guise that what you were buying was every bit as safe and easily liquidated as a money- market fund -- aren't required to bid on it.

The auction market relied on convention. It was a convention for underwriters to backstop the auctions -- not, as we know now, a requirement. The dealers did their job well, and for more than two decades. Auctions hardly ever failed, and so the market grew and grew, with Bank of America Corp. estimating earlier this year that it totaled $330 billion. States and municipalities sold about half; something like $60 billion was sold by closed-end funds.

The investors who bought those closed-end funds' preferred shares aren't happy about not being able to access their money, if my e-mail inbox is any indication. They want out, a desire bound to increase as the April 15 tax deadline approaches.

The sponsoring companies, such as Nuveen, have uttered conciliatory words, but so far have taken no real action. At this point, it is hard to see a scenario under which investors would be bailed out of their positions in these kinds of securities. Some dealers have offered to lend investors money.

Over the last couple of weeks, a number of firms have set up secondary-market trading platforms for those who want to sell. That's got to be welcome news for the desperately cash-hungry, but getting less than 100 percent on the dollar can hardly be satisfying to those investors who thought they were holding a cash equivalent. How much is the market going to discount their holdings? Is it 15 percent? Maybe 20 percent?

Thousands of investors are holding securities that pay them money-market rates with none of the benefits of money-market funds. It's even worse than that. They are holding securities that pay a relatively low rate of interest and that seem to have no maturity, at least within most people's lifetimes. Their money is safe, and inaccessible.

How much did investors know about these things? Did they know the interest rate paid on the shares was set at periodic auctions? Did they appreciate what might happen if the auctions failed? Did they even look at the offering prospectuses where such details are usually disclosed? Or did they simply rely on what their brokers told them?

I suspect the answer is that most investors relied on their brokers. And that those brokers relied on convention: Auctions never fail.

We know how the auction-rate problem ends for states and municipalities. They convert their auction-rate securities and stop using a method of finance that depends on a certain level of active manipulation by dealers.

How is the matter resolved for those investors who bought closed-end-fund preferred shares? Right now, there doesn't seem to be much incentive for any of the parties to fix it. The lawyers who sniff out trouble are circling and ready to sue the Wall Street firms that sold this stuff.

If I had to bet, though, I think the solution is going to come from the fund companies themselves rather than from the securities firms. And who knows? Perhaps the auction market isn't dead, and will somehow revive. That's difficult to imagine, but not impossible.

In the meantime, if you own auction-rate securities sold by closed-end funds, you had better be prepared to hold.

+ An owner of $60 million+ of ARPs emails me that his "strategy" is:

1. VERY FIRMLY, call your brokers and notify them that you NEVER authorized them to purchase Auction Rate Preferred Shares

2. You want 100% of your principal returned immediately.

3. In the event they don't agree, notify them you will legally hold them accountable for all principal, interest, and damages.

4. A loan makes no sense, since we are acknowledging collateral on an asset we NEVER authorized them to purchase.

This is a formal complaint to the broker, which we have made, and we are awaiting a response which could take 2-3 weeks. After that, we band together and attack.

+ A California law firm has issued a press release:

LOS ANGELES, March 6 /PRNewswire/ -- Los Angeles based attorney Byron T. Ball of The Ball Law Firm LLP announced today that the firm is offering advice to Corporations, High Net Worth Individuals, Funds, and Businesses that are facing liquidity problems in the auction rate preferred market. Ball said, "We view this as a tremendous opportunity to help position our clients to recover or minimize any damages they may have sustained."Contact Byron T. Ball, Eric Gowey, or Jennifer Woodward at The Ball Law Firm LLP, 10866 Wilshire Blvd. Suite 1400 Los Angeles, Ca, 90024. Call 1-866-240-6177.

They've been so inundated with phone calls, they take your name and say they'll call you back "within 24 hours." I'm still waiting.

+ James Stewart continues to publicize the ailments facing ARPs. He told me he was on CNBC yesterday. I couldn't find a video clip. For an earlier interview with him click here.

+ I have added some more executives below.

I repeat: If you own failed auction rate preferred securities (ARPS), please send me an email. We need to talk. There are serious benefits in combining our thinking. . I am not a law firm. I am not a financial advisory firm. I am not seeking fees, I am stuck in these things, just like you. I am seeking collective wisdom.

Failed auctions reading:
+ Auction Bond Failures Near 70%; No Sign of Abating (Update2). From By Michael McDonald. Click here.

+ Allianz Global Investors Fund Management Provides an Update on Auction Rate Preferred Shares issued by its Closed-End Funds. Click here.

+ Nuveen eyes auction-rate options, offers no timeline. Dow Jones Newswires. By Daisy Maxey. Click here.

+ No Answers Yet To a Trillion-Dollar Question, Wall Street Journal March 5, 2008, page D3 by James B. Stewart. Click here.

+ Risks of a 'Safe' Investment Are Found Out the Hard Way. Wall Street Journal. February 27, 2008; page D4 by James B. Stewart. Click here.

+ The reality of the Failed Auction Market. Capital Advisors Group. Click here.

+ Calamos releases comment on auction rate securities market. Click here.

+ Frozen Liquid: More Auction-rate Securities Put on Ice. SBA Communications becomes the latest company stung by auction-rate securities when its inability to liquidate them forces it to take a $15.6 million impairment charge. From By Tim Reason. Click here.

+ Another Kick in the ARS. As troubles continue in the auction rate securities market, Massachusetts's securities regulator begins probing financial firms for information. From by Tim Reason. Click here.

+ Nuveen Squeezed as Auction Failures Rise; OppenheimerFunds Buys. From By Jeremy R. Cooke and Adam L. Cataldo. Click here.

+ No Mark of ARS? Bristol-Myers Replaces Its CFO. Drugmaker says the change doesn't reflect its recent $275M charge. It selects Royal Numico finance chief Huet to succeed Bonfield. From By Stephen Taub and Roy Harris. Click here.

+ Replay of Eaton Vance conference call. 1-800-642-1687. Access code 37152796.

People to write to and to express your anger: We are adding more names each day. Send your favorite villains.

+ Nuveen is owned by Madison Dearborn. Tim Hurd is Madison Dearborn's partner in charge of their Nuveen investment. (They paid $5.75 billion for Nuveen.) His email address is His phone number is (312) 895-1170.

+ Eaton Vance chairman and CEO, Thomas E. Faust, Jr. His email is His phone number is 800-225-6265 ext 8201. His executive assistant is Kelly Creedon. His address is Eaton Vance, 255 State Street, Boston, MA 02109.

+ The closed end fund top dog at BlackRock is Brian D'anna. He's on Linkedin. Also CEO - Laurence Fink -
and CFO - Paul Audet -

+ Van Kampen CEO - Michael Kiley. COO - Ed Wood - Jack Reynoldson - Executive Director, Fixed Income Investments - 630-684-6325; All these other employees can be found by asking the Operator to be connected to their office - Operator # is 630-684-6325 Steven Massoni - Managing Director Unit Investment Trusts; Andrew Scherer - Managing Director Investment Platforms; David Linton - Managing Director National Sales and Howard Tiffen - Managing Director Senior Loan.

+ BlackRock. Robert Kapito, President -; Scott Amero - CIO Fixed Income -;
Robert Doll - CIO Equity - ; Bennett Golub - Managing Director and Head of Risk and Quantitative Analysis -

If you have more names, send them. These people need to understand the misery they have inflicted on countless thousands of innocent people. They need to understand that their businesses depend on our trust. Right now they have lost our trust. The longer they delay finding a solution, the less we will ever trust them. That includes the brokers and the issuers.

How Wall Street works: The SEC has fined Fidelity Investments $8 million and brought civil charges against former star money manager Peter Lynch and 12 others for receiving improper gifts from outside brokers vying to win Fidelity's lucrative trading business. Fidelity, which is the U.S.'s largest mutual fund manager was found to have accepted more than $1.6 million in perks from 2002 to 2004. In the judgment dated March 5, 2008, you'll read what Fidelity did, which included (I don't make this stuff up):

During the period from at least January 2002 through October 2004, two Fidelity senior executives (DeSano and Grenier) and ten Fidelity equity traders (Beran, Bruderman, Burnieika, Burns, Donovan, Driscoll, Harris, Horan, Pascucci and Smith) in aggregate accepted approximately $1.6 million worth of travel, entertainment and gifts from brokerage firms that sought and obtained orders to buy or sell securities on behalf of Fidelity's advisory clients.5 In addition, Lynch requested and received tickets to events from two equity traders, who obtained those tickets from brokers. Those brokerage firms each received millions of dollars in commission revenue for handling orders from Fidelity's advisory clients' accounts. DeSano and the traders in aggregate accepted from brokers dozens of expensive trips, frequently by private jet, including excursions to the Super Bowl, family vacations to Bermuda, Nantucket and the Caribbean, golf outings at exclusive clubs in Florida and South Carolina, weekends in Las Vegas, lodging at fine hotels, and even an extravagant, three-day bachelor party for Bruderman in Miami. Brokers also provided the Fidelity executives and traders with gifts including premium tickets to the World Series, the U.S. Open, Wimbledon, Rolling Stones concerts, and dozens of other sporting events and concerts. In addition, certain traders accepted illegal drugs from brokers and one trader's illegal gambling was facilitated by a broker.

17. The ten traders allowed the receipt of travel, entertainment and gifts to influence their selection of brokers to handle transactions for Fidelity's clients. As one trader commented to another, "Word is out that order flow is for sale." In addition, certain traders routinely sent transactions to brokers who were members of their families or brokers with whom they had a romantic relationship.

18. DeSano, who supervised Fidelity's equity trading operations, personally accepted travel, entertainment and gifts from brokers who sought and obtained securities transactions for Fidelity's clients. He solicited tickets from brokers for himself and to satisfy requests from his supervisor, Grenier. He accompanied certain traders on several trips by private jet paid for by brokers, including attending part of Bruderman's bachelor party in Miami, and traders told him about some of the other private jet trips and tickets they received from brokers. He also knew that certain traders directed transactions to brokers who were members of their family or with whom they had a romantic relationship.

You can read the entire delicious document. Click here.

The wonderful pirate joke.
A pirate walked into a bar and the bartender said, "Hey, I haven't seen you in a while. What happened? You look terrible."

"What do you mean?" said the pirate. "I feel fine." Bartender: "What about the wooden leg? You didn't have that before."

Pirate: "Well, we were in a battle and I got hit with a cannon ball, but I'm fine now."

Bartender: "Well, okay, but what about that hook? What happened to your hand?"

Pirate: "We were in another battle. I boarded a ship and got into a sword fight. My hand was cut off. I got fitted with a hook. I'm fine, really."

Bartender: "What about that eye patch?"

Pirate: "Oh, one day we were at sea and a flock of birds flew over. I looked up and one of them shit in my eye."

"You're kidding," said the bartender. "You lost an eye just from birdshit?"

Pirate: "It was my first day with the hook."

The weekend: Hug the spouse, the kids and the grandkids. Get some rest and some exercise. All this will blow over.

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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