Boca Raton Auction Rate Securities

The loss of liquidity caused by the collapse of the Boca Raton auction rate securities (ARS) market in February 2008 is, for good reason, worrying and angering many investors. Thousands of people and hundreds of companies saw their finances suffer after their funds were frozen in auction rate bonds. Although investment firms, banks, and broker-dealers had long touted ARS stocks and bonds as safe, liquid, cash-equivalent investments, Boca Raton investors have been unable to access their invested funds since the market crash.

The Boca Raton ARS Market Collapse

The collapse of the Boca Raton auction rate securities market was caused by the actions of broker-dealers and the design of the ARS system itself. Auction rate securities, a type of variable-rate debt, are long-maturity-period bonds or preferred stock which have mutable interest rates instead of fixed ones. Every 7, 28, or 35 days, this interest rate is reset to a new level by a Dutch auction, at which buyers bid to purchase available ARS holdings at certain interest rates. The new interest rate is equivalent to the clearing rate at auction, or the lowest interest rate at which there are enough bids to ensure that all available shares are purchased.

While such an auction system did indeed create a sort of artificial liquidity for Boca Raton auction rate securities investors, it also laid the framework for the market’s eventual freeze. Because ARS auctions cannot succeed unless enough bids are submitted, broker-dealers historically chose to support the market by acting as bidders of last resort in their own auctions, buying up unwanted shares to ensure auction success. This fact, conveniently concealed from investors, meant that the entire $300 billion market was essentially dependent on the whims of broker-dealers.

By early 2008, broker-dealers were under heavy financial pressure from losses in the subprime loan market and the steady decline of bond insurers’ credit ratings. As a result, dozens of broker-dealers across the nation suddenly pulled out of the auction rate securities market, causing hundreds of auctions to fail within weeks for want of bids.

Effects of the Boca Raton Auction Rate Securities Market Crash

At first glance, the problems in the Boca Raton ARS market do not seem so bad for investors. Auction failures meant that the interest rate on ARS holdings was automatically reset to a predetermined penalty rate – a rate often far higher than the bonds’ original market price.

Unfortunately, that was not the full story. While some Boca Raton investors did indeed see interest returns on their auction rate securities increase, others, particularly those holding student loan backed auction rate bonds, saw the interest rate on their holdings drop to near zero.

Even more troubling to both individual and corporate investors was the loss of liquidity caused by the auction rate market collapse. Many investors had entered the auction rate securities market on the advice of investment firms who promised attractive rate of returns and the flexibility of a highly liquid asset. These investors expected to be able to convert their holdings into cash at any time so that they could use the funds to pay for important, time sensitive expenses. When this liquidity was destroyed by the market collapse, investors had few places to turn; many were forced to borrow their own money from banks who refused them access; others could only watch as the value of their investment suffered markdown after markdown.

The deceptive practices of major investment firms were responsible for trapping many investors in Boca Raton auction rate securities. If you have suffered because of these fraudulent tactics, call 800-220-9341 today to speak with an auction rate securities attorney about your case.