San Francisco Auction Rate Securities

The San Francisco auction rate securities (ARS) market was once promoted by investment firms and broker-dealers as a safe, liquid way for investors to make a profit. Many San Francisco investors bought into this belief, placing hundreds of thousands of dollars in ARS stocks and bonds, content in the assurance that they could sell their holdings and exit the market any time of their choosing. Most were caught unaware when virtually the entire $300 billion auction rate securities market seized up in February 2008, rendering bondholders unable to find buyers for the holdings they thought were guaranteed to be liquid.

The Role of San Francisco ARS Broker-Dealers

Historically, broker-dealers have taken a more active role in the San Francisco auction rate securities market than most people realize. In addition to running the periodic auctions which gave auction rate securities their liquidity, broker-dealers also took on the role of bidders of last resort – providing bids in their own auctions to ensure that a clearing rate could be determined. The clearing rate, which is the lowest interest rate at which there are enough buyers to cover all shares available for sale, becomes the new interest rate for the subsequent period.

Broker-dealers are handsomely paid for their services, raking in millions of dollars every year for running auctions alone. Acting as bidders of last resort, however, was not part of the job. In 2008, reacting to pressures from the credit crunch and mortgage loan crisis, several major auction rate securities broker-dealers abruptly ceased bidding in their auctions. The effect was immediate. Several hundred auctions, representing the vast majority of all ARS auctions, failed within weeks.

Liquidity and San Francisco Auction Rate Securities

The liquidity of auction rate securities is created by the frequent and periodic auctions from which they take their name. These auctions allow bondholders to sell their holdings quickly, frequently, and at minimal loss of value – the three criteria for liquidity.

Unfortunately, the liquidity of San Francisco auction rate securities was not something intrinsic to the system, but rather something which was dependent on the system. At their core, auction rate securities are simply long-term bonds (with extremely long maturity periods) with fluctuating interest rates. As long-term bonds, their intrinsic liquidity is virtually nonexistent; it is the artificially created auction market system which allows the liquidity to exist.

Investment firms, eager to promote San Francisco ARS sales to their customers, advertised them as investments which were both safe and liquid. They failed to inform consumers and investors, however, that the liquidity was something generated at the will of broker-dealers, and was not guaranteed to last.

Taking Action Against Auction Rate Securities Fraud

If you are an investor whose funds have been frozen by the recent San Francisco auction rate securities market collapse, your investment firm may be responsible for providing you with misleading information – or for failing to provide you with the whole story. Don't let investment firms and broker-dealers continue to profit at the expense of yourself and other investors – contact an auction rate securities fraud lawyer at 800.220.9341 today to discuss your legal options.