Monday, April 21, 2008

Shrinking size of the auction-rate securities (ARS) problem

According to a Bloomberg article by Jeremy R. Cooke entitled "Auction-Rate Market Shrinks by 18% Amid State Probes" the amount of outstanding auction-rate securities (ARS) has declined by about $59 billion or 18% since January:

At least $58.9 billion, or 18 percent of the securities outstanding in January, have been redeemed or will be converted by states, cities, hospitals and closed-end mutual-funds, data compiled by Bloomberg show.

...

Borrowers are replacing bonds whose yields are set through periodic auctions after the market's collapse raised taxpayers' debt costs to as high as 20 percent, kept investors from selling their holdings...

More than 60 percent of the thousands of auctions conducted each month have failed since Feb. 13, data compiled by Bloomberg show. The average rate on seven-day municipal auctions soared to 6.89 percent Feb. 20 from 3.63 percent a month earlier, according to the Securities Industry and Financial Markets Association. The rate fell to 4.62 percent as of April 16, the lowest in 10 weeks, the latest data show.

...

Borrowers have converted or plan to replace at least $48.3 billion of municipal auction debt by the end of next month, according to disclosure notices received by Bloomberg. BlackRock and nine other fund managers said they plan to redeem at least $10.6 billion in taxable and tax-exempt preferred auction shares, whose rates also change through dealer-run bidding.

There is still a long way to go, but at least there is some visible progress on resolving the auction-rate securities fiasco.

I also read in a Q&A session with Warren Buffett published by Fortune Magazine  entitled "What Warren thinks..." that he is getting involved in cleaning up the mess:

In the past seven or eight or nine weeks, Berkshire has built up a position in auction-rate securities of about $4 billion.

-- Jack Krupansky

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