"· Auction rate securities - the latest corner of the credit crisis to see strain
· What are auction rate securities? Auction bonds have interest rates that are determined by bidding that typically occurs every seven, 28 or 35 days. When there aren't enough buyers, the auction fails and bondholders who wanted to sell are left holding the securities. Until recently, UBS and other banks that collect fees for running auctions have stepped in with their capital to prevent failures when bidding falters. These firms have grown unwilling to commit their money to auction-rate securities - Bloomberg. From the WSJ: These securities are issued by municipalities, student-loan authorities, museums and many others, with interest rates that reset through bank-managed auctions every week to 35 days. From Morgan Keegan: "Auction Rate Securities (ARS) are securities with long-term maturities that are structured with short-term holding periods. A Dutch Auction takes place at the beginning of each holding period, which determines the coupon/dividend". Why have the auctions been failing? In addition to investors' growing aversion to complex fixed income securities, many of the auction rate securities are insured by the likes of MBI and ABK.
· Billionaire Mahers Rack Up Losses In `Auction' Bonds: When M. Brian and Basil Maher sold their family's shipping business last July for more than $1 billion, they quickly put the money in a safe place. Or so they thought. The two brothers handed much of it to Lehman Brothers with marching orders to make only the most conservative, cashlike investments. Within weeks, however, they had lost access to more than a quarter-billion dollars. The Mahers rank among the earliest victims of "auction rate" securities – WSJ "
Btw I have no ax to grind here. I sold all my pre-$3.75 divvy stock after the positive tax news, and re-established a small position from a little higher than the current price. So I am hopeful this situation works out.
But I think some of the risks to this situation are being completely glossed over by some on this board. They have a real liquidity issue in their auction rate securities that may take many months to resolve best case. Worst case has Ambac going bankrupt and ALSC becoming a creditor behind all the holders of the billions of dollars of bonds guaranteed by Ambac.
That is pretty much the story, except I do not believe the securities ALSC holds are guaranteed by ABK since they carry a AA rating by S&P and would carry a AAA if guaranteed. I am waiting on the sidelines for the 10K since ALSC will need to write these down and probably classify them as long-term which is what ADCT and CIEN have been doing.