Investors holding auction-rate securities may not see a thaw in their frozen market anytime soon. But for those stuck holding the toxic paper, there may be hope for a rescue. Think of it as the investment world's answer to Ernest Shackleton rescuing his men from the ice-battered ship Endurance.
Money management firm Eaton Vance
ARSs were touted as being just as good as cash. As their name suggests, the interest rates of auction-rate securities are set at auction every few weeks. Or at least that was true until February. Where once there had been a fairly robust market for such securities, holders found themselves unable to sell them -- even the investment houses that marketed them would no longer touch them. Money that was supposed to be "just like cash" became practically worthless, at least in the near term, because the holders of these securities no longer were able to access those funds.
For companies like Bed Bath & Beyond
If you're an individual investor who bought such securities from brokers like Eaton Vance, Nuveen Investments, or BlackRock
The new securities -- Eaton Vance is calling them liquidity protection preferred shares (LPP) -- have rates that are set every few weeks, just like ARSs. The big difference, though, is that LPPs will have liquidity backing from banks, guaranteeing access to cash. This feature will allow money market funds that were locked out of the ARS market to purchase LPPs. Then, issuers could take the proceeds from LPPs to pay off their ARS holders.
The sticking points were whether the Securities and Exchange Commission and the Internal Revenue Service would permit money market funds to purchase LPPs, and whether tax-exempt interest would continue to flow to shareholders of tax-free money market funds. Both the Treasury Department and the SEC have said that the funds can proceed as planned without facing adverse consequences.
Individuals may soon have their cash again, but whether the reputations of the investment managers who sold the securities to them will remain intact is far less certain. I'd be more willing to bet on a modern-day Shackleton making it back to Elephant Island once again than on money managers learning from this debacle.
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