Investors who still hold auction-rate securities are facing many increasing problems, according to an article in today’s Bloomberg.com by Michael McDonald. Last February, the $330 billion market for auction-rate securities essentially froze when major Wall Street firms discontinued supporting auction-rate securities. A year later, investors are still stuck with as much as $176 billion of auction-rate securities that pay an average of 1.36%. Thus, it is apparent that many investors have been left out in the cold even after regulators forced some firms to buy back more than $50 million of auction-rate securities. Investors are stuck is because the market remains frozen and issuers either have no incentive to refinance or are unable to refinance. Many investors rightly complain that a large portion their liquid wealth is frozen and paying next to nothing in interest, and, while they may be able to liquidate their holdings in the secondary market, they can do so only if they accept less than what they paid for the auction rate securities.
Perhaps of even greater concern to investors, however, is the fact that the financial condition of many of these auction-rate securities issuers continues to deteriorate as the economy gets worse. For example, it is widely reported that most municipal issuers are experiencing budget shortfalls due to lower tax revenues resulting from lower property tax and sales tax collections, among other things. Similarly, an increase in defaults on students loans (students can’t make their loan payments because they have lost jobs or can’t find jobs) threatens the viability of the issuers of student loan auction-rate securities. Finally, many closed-end mutual funds that issued auction rate-securities have suffered serious setbacks in the markets adversely impacting their financial wherewithal. All in all, ongoing developments paint a pretty dismal picture for auction-rate securities investors. These developments raise troubling questions about the ability of some of these issuers to continue to pay interest and principal over the term of the securities.
Atlanta attorney J. Boyd Page of Page Perry observed that, “I know that many investors are reluctant to realize losses and hope that things will get better, but these investors also need to appreciate that things could get a lot worse. Furthermore, investors who have viable legal claims risk losing those claims if they wait too long.”
In summary, investors who still continue to hold auction-rate securities without taking action should appreciate that they are exposed to potentially significant losses in the long run. These investors should carefully weigh the pros and cons of disposing of their auction-rate securities in the secondary market for less than face value, and seeking legal redress for the difference in value. As painful as it is to realize a partial loss, it is wise to consider steps that may prevent a total and permanent loss.
Page Perry is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 30 occasions. Page Perry’s attorneys are actively involved in representing institutional and corporate investors in auction-rate securities cases. For further information, please contact us.