San Antonio Auction Rate Securities

The three-decades-old auction rate securities (ARS) market is today valued at over $300 billion. Individual investors, local governments, and even enormously successful corporations – all are players in what was once touted as a safe-as-cash market. Yet, in February 2008, the ARS market stalled and crumbled, locking up the hard-earned money of many San Antonio auction rate securities investors in long-term bonds which were now virtually unsellable.

Mechanics of San Antonio Auction Rate Securities

Auction rate securities are, in practice, a type of hybrid between long-term and short-term debts. They consist of long-term, long maturity period bonds with variable interest rates which are reset in short, fixed intervals by a Dutch auction system. At these auctions, which are held every 7, 28, or 35 days, existing bondholders can sell their holdings to buyers, thus creating an artificially liquid investment system.

Investors who wish to buy San Antonio auction rate securities shares at auction submit bids to purchase a number of shares at a certain interest rate. When all bids have been received, the entire issue is sold at the clearing rate – the lowest interest rate at which there are enough bids to cover all available shares. Buyers who bid at or below the clearing rate receive shares; those who bid higher receive nothing. The clearing rate becomes the new interest rate until the next auction.

Broker-Dealers and the San Antonio ARS Market Flaw

In just three short decades, the ARS market swelled to enormous size and popularity. Investors were enticed by promises of safety, liquidity, and comparatively high rates of return, while bond issuers enjoyed lower financing costs and a simplified financing process.

Unfortunately, the entire market was predicated on one vital factor, which neither investors nor issuers could control – the actions of auction rate securities broker-dealers. These broker-dealers were banks and major financial corporations who ran the period auctions at which interest rates were reset and ARS assets changed hands. Many investors did not know that broker-dealers were responsible for consistently shoring up the ARS market by bidding in their own auctions to prevent auction failure. Those who were aware of such a practice assumed it was an obligation on the part of broker-dealers and took it for granted.

In February 2008, broker-dealers began pulling out of the auction rate securities market in response to concerns over the credit ratings of bond insurers. Without the support of broker-dealers' bids, hundreds of auctions failed, overloading the market with sell orders which could not be matched to willing buyers.

San Antonio Auction Rate Securities Investor Backlash

As the promises of investment firms and broker-dealers crumbled away, San Antonio investors quickly realized that they had been duped. Unable to sell their holdings at auction, and saddled with long-term bonds which they had never wanted, they looked to their investment firms to take responsibility for the deceptive advertising which set the stage for the current crisis. Neither investment firms nor broker-dealers, however, were keen to redeem the investments of their San Antonio customers; even as the market failed, these corporations continued to rake in millions of dollars in profit from running ARS auctions.

As a San Antonio investor, you may have a legal case against the investment firms whose fraudulent advertising and overly aggressive marketing ensnared you in the auction rate securities market. To learn more, contact an auction rate securities fraud lawyer today at 800.220.9341.