by Calculated Risk on 4/23/2009 06:31:00 PM

A friend called me up early last year and told me that she had just put a significant amount of money in Auction Rate Securities with Wells Fargo. She started to tell me what a great deal it was, and I interrupted her: "Hang up. Call Wells Fargo. Get out now." She called Wells Fargo immediately, and she couldn't sell - and she has been stuck in this "investment" ever since.

From the LA Times: Wells Fargo accused of securities fraud by state lawsuit

California today sued investment subsidiaries of Wells Fargo & Co. for securities fraud, alleging that the San Francisco financial services company misled investors by selling $1.5 billion worth of risky securities that it peddled as being as safe as cash.

The securities "were sold to customers on the basis that they were like cash and people could get their money back in eight days," Atty. Gen. Jerry Brown said in an interview. "Now, it turns out they were not like cash and people can't get their money back even after many, many months, and they're mad as hell."

My friend was also told these securities were "as good as cash" and she could get her money back with eight days notice. It is especially irritating to see a Wells Fargo spokesperson say:

"We fully understand and deeply regret the effects this prolonged liquidity crisis has had on our clients," Charles W. Daggs, chief executive of Wells Fargo Investments, said in a statement.

"Wells Fargo could not have predicted these extraordinary circumstances, and even with the benefit of hindsight is not responsible for them."

Yeah, hoocoodanode?

by Calculated Risk on 2/21/2008 09:56:00 AM

Mastercard has invested some of their working capital in Auction Rate Securities (ARS). Right now they can't sell the ARS. There is little credit risk, but this could be a liquidity concern for other companies.

From the Mastercard SEC 10-K filing today (hat tip BR):

The Company sold approximately $100 [million] in auction rate securities subsequent to December 31, 2007, however starting on February 11, 2008, the Company experienced difficulty in selling additional securities due to the failure of the auction mechanism which provides liquidity to these securities. The securities for which auctions have failed will continue to accrue interest and be auctioned every 35 days until the auction succeeds, the issuer calls the securities, or they mature. Accordingly, there may be no effective mechanism for selling these securities and the Company may own long-term securities. As of February 15, 2008, the Company had approximately $252 [million] of auction rate securities and at this time it does not believe such securities are impaired or that the failure of the auction mechanism will have a material impact on the Company’s liquidity.

And it appears, according to the following Bloomberg article that the reason the auctions are failing is because the investment banks are no longer backstopping the auctions: Auction Debt Succumbs to Bid-Rig Taint as Citi Flees

The collapse of the auction-rate bond market, where state and local governments go to raise cash, demonstrates that regulators are no match for Wall Street.

Hundreds of auctions have failed this month, sending borrowing costs as high as 20 percent because dealers from Goldman Sachs Group Inc. to Citigroup Inc., UBS AG and Merrill Lynch & Co. stopped using their own capital to support the sales. Regulators, who allowed the manipulation of bids and lack of information to persist even after two probes in the past 15 years, are now watching a $342 billion market evaporate at the expense of taxpayers.

Inadequate disclosure ``may have masked the impact of broker-dealer bidding on rates and liquidity,'' Martha Haines, head of the Securities and Exchange Commission's municipal office, said in an interview. ``The large numbers of recent auction failures, which are reported to have occurred due to a reduction in bidding by broker-dealers, appears to indicate those concerns were well founded.''

This shows the spread of the credit crunch. The banks are suffering a liquidity crisis (because of a solvency crisis). They are not backstopping the ARS, forcing state and local governments to pay higher rates on the ARS or refinance at a higher rate with longer term maturities - and causing a potential liquidity problem for corporations.