Comments on: Yet More Auction Rate Securities Distress

By: Anonymous

Anonymous — Thu, 21 Feb 2008 04:15:00 +0000

Wondering how long it will take the issuers of investment grade muni ARS to call them back at par given that they aren’t going to want to continue paying the current high reset rates? I’m currently holding some AAA ARS munis that are insured by FSA, and they are still investment-grade even without the insurance. One of them reset at 10%. How long can I expect this to last before they call the bonds back at par?

Given the state of the economy, should I be paranoid about potential defaults even if the municipality has a good underlying credit rating? Or is this really a once-in-a-lifetime chance for some high yields with little risk other than that they will likely be called back in the near future at par (and then I would have to settle for measly money market rates instead of 10% tax-free income)?

By: Max

Max — Wed, 20 Feb 2008 19:47:00 +0000

I still don’t understand why the munis went to adopt the AR system, especially at times of flat-to-negative yield curves. I would understand their desire to tap the short end when the long yields were not in their favor, but with treasuries below 5% what was the reason to gamble?

By: Yves Smith

Yves Smith — Tue, 19 Feb 2008 18:12:00 +0000

Yes, if you don’t need the liquidity, the munis’ pain is your gain.

By: Anonymous

Anonymous — Tue, 19 Feb 2008 17:58:00 +0000

Yves, Don’t investors in these auction-rate securities make out like bandits as long as there are no defaults? Are investors in those Buffalo water system bonds laughing all the way to the bank (at least if they don’t need the money in the short term)?

By: Yves Smith

Yves Smith — Tue, 19 Feb 2008 14:16:00 +0000

Banks are regulated and are required to hold capital because accepting short term deposits and lending long is recognized as a valuable but risky function for the economy. They often get their heads handed to them even though this is their raison d’etre.

Municipalities get approval from taxpayers (either directly by approving bond issues or indirectly via who they elect) to enter into certain projects deemed useful for the community. They weren’t authorized to speculate with the public’s money, which is what this sort of thing is.

By: Anonymous

Anonymous — Tue, 19 Feb 2008 11:16:00 +0000

“The idea that one is going to fund long term obligations in a short term funding market is nuts, unless you have a skilled, market savvy treasurer who is prepared to move to longer maturities when you see the short end of the yield curve move against you”

Except that funding long term liabilities with short term funding is precisely the business of the retail banking industry. If it’s good enough for them, why not our public institutions?

By: Anonymous

Anonymous — Tue, 19 Feb 2008 11:00:00 +0000

If municipalities need to raise short term money why can’t they use the Term Auction Facility at the Fed?