Auction-Rate Securities: Bidder's Remorse? New Paper Released from NERA Economic Consulting
6 May 2008
New York/6 May 2008 -- A new working paper on the crisis in the auction-rate securities (ARS) market was released today by NERA Economic Consulting, a leading global provider of economic advice and analysis in business, legal, and regulatory matters.
Authored by NERA Senior Consultant Stephanie Lee, "Auction-Rate Securities: Bidder's Remorse?" offers analysis and insight into a financial crisis that is charting a deepening course into corporate balance sheets and courtrooms across the country.
The paper explores the evolution of auction-rate securities in depth, from their creation in the mid-1980s through continued market developments in the 1990s and 2000s, up through the present crisis, when the market "virtually collapsed" in February, according to the Wall Street Journal. Ms. Lee then explains the responses to auction failures by a number of key participants, including issuer restructuring, corporate write-downs, and litigation.
One important distinction the paper makes is that while the recent failures in the ARS market have affected a number of participants, these effects are by no means uniform. Rather, the auction-rate market encompasses securities and issuers of varying characteristics, and any successful examination of "what happened" requires close analysis of the particular securities at issue, their individual characteristics, and their markets. Given the potentially substantial impact of pending litigation and regulatory investigations, this key distinction must not be overlooked.
Auction-rate securities are long-term variable-rate instruments with their interest rates reset at periodic and frequent auctions. Historically, they were sometimes marketed to issuers as alternative variable-rate financing vehicles and to investors as a "higher-yielding cash alternative." Prior to the current crisis, investors had typically been able to liquidate ARS positions at face value at frequent auctions, leading many to consider them cash-like.
Other elements of the new paper include:
- A summary of current ARS-related litigation and regulatory investigations
- Inside a corporate write-down: a detailed financial statement analysis of a corporate holder of ARS, using Bristol-Myers Squibb as an example
- A thorough examination of the ARS market: what they are, how they started (in 1984, not 1988 as usually cited in the press), and how the market evolved and found itself in the current crisis
- A closer look at the Dutch auction process: how it works, and why auctions succeed or fail, using easy-to-follow examples
- A glossary with explanations of more than 40 related terms
This paper and other securities-related content may be found on the NERA website at www.nera.com/securities.
About NERA
NERA Economic Consulting is an international firm of economists who understand how markets work. We provide economic analysis and advice to corporations, governments, law firms, regulatory agencies, trade associations, and international agencies. Our global team of more than 600 professionals operates in over 20 offices across North America, Europe, and Asia Pacific.
NERA provides practical economic advice related to highly complex business and legal issues arising from competition, regulation, public policy, strategy, finance, and litigation. Our more than 45 years of experience creating strategies, studies, reports, expert testimony, and policy recommendations reflects our specialization in industrial and financial economics. Because of our commitment to deliver unbiased findings, we are widely recognized for our independence. Our clients come to us expecting integrity and the unvarnished truth.
NERA Economic Consulting (www.nera.com), founded in 1961 as National Economic Research Associates, is a unit of the Oliver Wyman Group, an MMC company.
