Deep Freeze in Auction Rate Securities At A Glance

Capabilities and Services

Over 80% of auction rate notes have bond insurance or some other credit enhancement. However, with the recent distress of monoline insurers, investors have become concerned about the quality of their credit enhancement. This, in turn, has triggered significant and rapid distress in the ARS market. In fact, although fewer than 100 auctions failed between 1984 and 2007, there were hundreds of auction failures in February 2008 alone, as the market "virtually collapsed" according to the Wall Street Journal.

In the past, if demand fell short then sometimes the brokerage firms running the auctions would themselves step in as buyers. However, many underwriting brokers are currently experiencing their own difficulties and have generally chosen not to purchase ARS for their own balance sheets. Thus, many investors are surprised to find themselves holding illiquid securities and several corporations have written down the value of their ARS holdings due to "other than temporary" impairments in value.

While historical auction failures had been rare prior to 2008, NERA experts were involved with several arbitration proceedings resulting from failures in the 1990s. In addition, our securities experts have been involved in hundreds of broker-customer disputes examining issues related to suitability, risk, and valuation, and are well-positioned to assist clients in litigation and disputes relating to ARS and other fixed-income securities matters.