The auction rate blues…
Judging by the news this morning about new subpoenas going out over auction rate securities, this is one more headache for Wall Street that’s likely to get worse. So I decided to take a look at how companies are talking about this mess in their recent filings. The short answer is a lot more than they have before: there were 870 10Ks, 10Qs, or 8Ks that mentioned the term during the first quarter of 2008. Just five years ago that number was a paltry 72. The problems have caused a whole host of companies — from Continental Airlines (CAL) to Standard Microsystems (SMSC) to reclassify these short-term investments as long-term investments because the market has essentially collapsed.
One of the more interesting disclosures I came across yesterday was in the supplemental financial material that SLM (SLM) filed yesterday as part of its 8K:
The Company has not recently and does not intend to rely on the auction rate securities market as a source of funding. At March 31, 2008, we had $3.3 billion of taxable and $1.7 billion of tax-exempt auction rate securities outstanding on a Managed Basis. In February 2008, an imbalance of supply and demand in the auction rate securities market as a whole led to failures of the auctions pursuant to which certain of our auction rate securities’ interest rates are set. As a result, all of our auction rate securities as of March 31, 2008 bear interest at the maximum rate allowable under their terms.
We also liked the disclosure in Tivo’s (TIVO) recent 10-K where they talked about “high-grade auction rate securities”, which we’re guessing is different than the regular auction rate securities the company had disclosed in previous filings, and different too from the crud that all these other companies have on their books. If anyone wants to clarify what makes some auction rate securities high-grade, I’m all ears.
With this much activity, it sounds like it’s high time for our friend Merle Hazard to head back to the studio and come up with another song.
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April 18th, 2008 at 8:29 am
For Tivo, High grade probably means the auction rate debt is insured or federally backed.
Perhaps they own some of Sallie Mae’s auction rate debt, that used to be popular…
April 18th, 2008 at 11:01 am
Another blurb on auction-rate securities from Felix Salmon at Portfolio.com:
“I was particularly interested by one component of the $13 billion in write-downs: $1.5 billion on auction-rate securities. Citi had $11 billion of these animals in February, but by the end of March, after write-downs and sales, it had brought its exposure down to $6.5 billion. Let’s say that it managed to sell $3 billion at or around par, and that it wrote down the remaining $8 billion by $1.5 billion. That would mean that Citi is valuing its unsold ARS portfolio at just 81 cents on the dollar.
No wonder Andrew Cuomo is investigating the ARS market. This stuff was meant to be like cash, and so far there have been few if any defaults. So why is it being marked at distressed levels?”
April 18th, 2008 at 11:28 am
Bloomberg radio and NYT all over this in am. Guess AG Cuomo in hot rush to replace E.S. as next ‘reformer’ Gov.
The attorney general of New York, Andrew M. Cuomo, has reportedly subpoenaed 18 banks that underwrote and brokered auction-rate securities, including Citigroup, Merrill Lynch, Morgan Stanley and UBS, as state regulators step up their inquiries into the securities and how Wall Street banks sold them to investors.
http://www.nytimes.com/2008/04/18/business/18rate.html?dlbk
April 18th, 2008 at 3:52 pm
Whenever I see the word “subpoena” in the same sentence with “auction rate securities” I get an enormous rush. I hope soon to start seeing the words “crime” and “prison”. I keep getting these statements from UBS which refer to my auction rate funds as “cash equivalents”. Isn’t this mail fraud?