Auction rate securities find no buyers

A recent attempted sale of over one hundred auction rate securities failed to find any buyers. Dealbreaker explains why this seemingly esoteric event could have nasty repercussions.

In the private wealth group, they’ve been treating these things as if they were cash. Clients were funneled into the bonds and told they were the most liquid investment short of actual cash. But yesterday the bond auctions failed in a dramatic fashion, leaving many investors in illiquid positions.

They can’t pull their money out until buyers appear. Right now, there are none.

This… is already having repercussions in the broader marketplace, including the stock market. Now that they are locked into the bonds, they are effectively frozen out of the stock market.

Or from buying a house. Or whatever. Imagine you had most of your cash in t-bills because they were supposed to be super-safe then were told, sorry, your money is stuck there because no one will buy them from you.

If this doesn’t turn around soon, there could be major financial consequences.

There’s there’s the bond reinsurers who have 4-5 days left to re-capitalize or else they get sliced and diced. If this happens, all manner of debt will get downgraded with no doubt severe impacts upon the general markets.


  1. Recently the auction on my sizable Kayne Anderson MLP Invt Co Sr Note failed. When I purchased the bonds, I was told that there will no problem getting the money out and no chance of principal loss. The rates get set every 7 days. Because of failure, I was told the rates go up from 4.38 to 6.15. Will try auctioning next week. The underlying securities are currently rated AAA. The problem is that I need the money to complete a apt purchase next month.

    What are my prospects for getting the money given the liquidity problem? Are there any govt regulatory agencies or legal options that I can turn for help? What can be done to restore liquidity to these debt paper?

  2. Yikes. Youir plight is shared by many others too. No one wants to buy those bonds until the bond insurer problem is resolved because of fears of the bonds being downgraded. (If the insurer is downgraded, the bonds are too.)

    Maybe you could get a short-term bridge loan with the bonds as collateral?

  3. My broker says the firm will provide a loan at Libor+0.5% against half the value of the closed end bonds issued by Kayne Anderson MLP Invt Co Sr Notes bonds and Prime-1.5%?? for the other half.
    Libor + 500bp rate is available for a limited time period (6 months)

    He thinks this will create a positive cash flow given the penaly rate for failure at about Libor + 3%?? (?? indicates not sure).

    I don’t know if this is a good deal under the circumstances. My preference will be to get out of the position asap. Can you see where this is heading, if the banks will enter the mkt and create liquidity? Can you suggest any recourse (regulatory or otherwise) given the bank represented the securities as risk-free 7 day paper when it was purchased? Will appreciate any comments

  4. > Libor+0.5%
    > Libor + 500bp

    0.5 is fifty basis points, 5% is 500 bp. Was this a typo? If so, which way?

    I can’t answer your questions. If it was me, I’d post it as a question on the most recent post on and say I need help and advice. They are solid pros there, someone, probably many, will have an idea what to do.

    You might also post it on , this is a small blog, but also quite savvy.

    Both are friendly. Good luck. Let me know what happens.

  5. My broker sold me $1,000,000 worth of ARP’s in different funds.
    I have filed a formal request for a malpratice claim against the brokers E & O insurance. Since most brokerage houses are self insured and must act under the rules of all insurance companies when claims are presented. They open themselves up to bad faith claims for failure to properly respond. Considering the opposing forces at play, doing the right thing as an insuror places them at odds with themselves. My hope is they act improperly and I will have a more valid claim against them for bad faith which will not be tied to the investment issue at all. It becomes a complete seperate issue, and can place tremendous pressure on these firms if everyone pursues this. Being in the insurance industry has made me aware of this angle, should an insuror act in bad faith, the claim for damages can far outweigh the losses in our frozen securities. I encourage everyone to file a written request to open a formal claim. You do not need an attorney to do so.

  6. I have a client who in November directed Bank of America to put him in low risk very liquid investments. He specifically request “muni bonds” and CDs, this was confirmed by B of A in writing. In February he became dissatisfied with B of A and liquidated the investment account. Everything was cashed out except 50k in ARSs.

    My client had never even heard of an ARS, nor did he consent to this security in his portfolio. The bank has refused to buy the bonds. WE will be pursuing a claim.

  7. I am a securities arbitration attorney, former securities prosecutor in Manhattan New York, screening many of these matters in relation to all the major firms – Merrill, JP Morgan Chase, Citigroup, Wells Fargo, etc. All have the same story – misled by the brokerage. Be careful of the “loans” they are offering as an alternative they are enticing people to dig their whole deeper and impacting any case they may have.

    If you would like a free consultation please contact me via my web site

    (Attorney Advertising).

  8. My two cents: I am a fund manager and we have been actively looking to buy these notes at a discount. We bought some at 87 cents on the dollar last week. My suggestion: keep them. They are great securities and will be resolved in due time. It doesn’t pay libor +3%, rather, it pays 200% of libor which today would be close to 6%. It is in Kayne Anderson’s best interest to redeem these , and given the fact that they own publicly traded equities in their fund, they can get much cheaper financing than this. As for the loans: at libor + 50 you will get the positive cash flow, and considering that you have a very secure asset, I’d encourage you to do that. The prime + 1.5% is way too expensive and will result in negative cash flow, therefore it is not worth it. Hope this sheds some light. We did a lot of work on them and the collateral is very good. It is only a liquidity issue and i am almost confident will be resolved in under a year.

  9. I’ve received the same advice from two different bankers I intertface with– AAA-rated bonds are selling for pennies on the dollar and are an excellent in vestment in this market. However, when I talked with my investment banker about specifics, it wasn’t practical for me to buy bonds. Instead, he recommended I buy stocks in companies that hold bonds, such as Alesco Financial (AFN). At the time, AFN was trading at 2.85 and had a P/E of 1.94. I was skeptical, but bought some anyway. The share price has steadily increased to 3.93– nice, though I’m holding it for the dividend. There’s also KKR Financial (KFN) with a Price/Book ratio of .87 and a P/E of 6.6, and a few others that look attractive in this market. When all debt instruments get painted with the same negative brush, some of them may be pearls among the swine.

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