raiders-of-the-lost-arsOn July 17, 2008 Missouri regulators raided the headquarters of Wachovia Securities, formerly A.G. Edwards & Sons, concerning the $330 billion auction rate securities (ARS) meltdown.  Unlike Indiana Jone, they were not looking for a lost treasure or some rare religious artifact. The raid was to investigate their sale practices on these investments based on more than 70 formal complaints that were filed with the Missouri Securities Division over the last four months, representing more than $40 million of frozen investments.  Wachovia is not the first one to get investigated.  Similar complaints have been filed against UBS Securities, Commerce Bank N.A. and Stifel, Nicolaus & Co. Inc.  Some of my clients have noticed and asked me what exactly an auction rate security is.

What is an auction rate security (ARS)?

These are type of debt instruments (corporate or municipal bonds) with a long-term nominal maturity for which the interest rate is reset through a Dutch auction.  For bond issuers, they present an opportunity to raise cash at lower interest rates, since the money is more liquid than a 20 to 30 year bond.  For the bond holder, it was supposed to be a safe way to earn more interest than the CD’s or money market.  ARS that were issued by collateralized debt obligations (CDO’s) is what started the crisis in August of 2007.  Primarily there was no interest in the auctions and some investors were not able to sell out of the rest.  This in turn caused a panic with other investors who sold out of their positions at a loss just to get their money back.  Right now most of money is ARS is frozen as bond houses are trying to redeem their investors’ money.  Imagine the fear and disgust with investors that are currently unable to get access to their money when it was supposed to be in a “safe” investment.

Regulators Surprise

And that’s the reasoning for the recent surprise visit; making sure that the proper disclosures were used when investing into ARS.  Negotiations are still in the works in making investors whole, but it looks like a long road ahead.


Securities offered through LPL Financial, Member FINRA, SIPC


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