"It's just like cash." Investors may have heard that phrase from their investment advisors or financial planners, but as they're coming to find out, "just like" cash is still regrettably far from actual cash.
Auction-rate securities, as their name suggests, have their interest rates set at auction every few weeks. Until February, there had been a fairly robust market for such securities; if the occasional auction failed -- meaning no one was buying the paper -- the investment houses themselves would buy them. That all changed as credit became more dear. Now, when the auctions failed, the investment houses refused to buy them, either. Money that was supposed to be "just like cash" became worthless, at least in the near term, since the holders of these securities no longer were able to access those funds.
Like a bank that shuts its windows during a run, the credit markets slammed the door to investors who wanted their money back.
The damage done
Palm's $25 million writedown on ARS holdings inflated its third-quarter loss from $32 million to $57 million. MetroPCS took an $83 million loss on its own auction rate securities in its fourth quarter. Other companies are evaluating their own ARS situations.
Large corporations like these will probably get their money back, since the bonds underlying the securities typically have long-term maturities. Intuit
The same long-term outlook can't be said for individual investors who were put into these investments by advisors and planners. They believed that ARS were just like cash, but unlike a multimillion-dollar corporation, they don't have the same ability to wait out the credit crunch. Many of these people don't need the cash now -- they needed it yesterday.
Winners and losers
Some companies that sold their clients these investments have likely damaged their reputations. And when the thaw does occur, there will be a real run on cash from their assets under management. Firms like Nuveen Investments, BlackRock
While many individuals relied upon their planners' advice to guide them, the same can't be said of Palm, Bed Bath & Beyond, and Monster Worldwide
Like the signs posted behind some registers at mom-and-pop stores note: "In God we trust; all others pay cash."
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Both Fool contributor Rich Duprey and The Motley Fool itself own shares of Bed Bath & Beyond. Rich does not have a financial position in any of the other stocks mentioned in this article. Check out his holdings. The Motley Fool has a disclosure policy.