Eighteen months after the auction rate securities markets collapsed when Wall Street withdrew its support, companies like Bristol-Myers Squibb Co., Texas Instruments, Corning, and Teva Pharmaceuticals are still suffering from the Wall Street debacle. They have written down their auction rate securities by $4.8 billion, according to an August 28 article on Bloomberg.com by Duncan McNichol called “Wall Street Betrayal Seen in $4.8 Billion Company Debt Losses.” The brokerage firms selling auction rate securities led their corporate clients to believe that auction rate securities were a lot like a money market funds while, at the same time, the they knew that auction rate securities faced grave problems and were being misrepresented as being safe and liquid. Similarly, many of the risks and problems in the auction rate securities markets went undisclosed to corporate buyers. Of 449 publicly trade companies holding $22 billion of auction rate securities, all but 45 have written down the value of their ARS holdings.
While other debt securities have rebounded, auction rate securities have not. Approximately $160 billion of auction rate securities have not been refinanced, according to Second Market, which purchases auction rate securities from holders who need to liquidate them. Second Market holds auctions among some 3,500 potential purchasers in its database. It has reportedly arranged $750 million in sales of auction rate securities in the first half of 2009. For more information, see “Auction-Rate Yard Sale,” August 22, 2009, Wall Street Journal, by Larry Light.
There is very little chance that the auction rate securities market will come back. “This is a dead asset class,” said Espen Roback, Pluris’s president. Accordingly, Bristol-Meyers sold auction rate securities with a face value of $642 million for an 82% loss, and has written down auction rate securities with a face value of $169 million to $75 million, according to the article. Similarly, Teva has written down auction rate securities with a face value of $273 to $10 million, and Texas Instruments reclassified its $533 million of auction rate securities as long-term debt, reporting losses of $41 million, according the article.
While twenty-three underwriter banks have agreed with regulators to repurchase more than $61 billion of auction rate securities, most of these settlements do not cover losses sustained by larger corporate and institutional clients. Those clients have been left to fend for themselves and many are aggressively acting to protect their interests.
Page Perry is handling a number of auction rate securities cases for investors who lost liquidity due to the collapse of the auction market. Based in Atlanta, Page Perry has a national practice through strategic alliances with other securities law firms.