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Financial Q&A: Patience thins over auction-rate securities

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Q: I have a big investment in auction-rate reset bonds issued by an investment-management and mutual-funds company. I was parking the money there to invest. When I tried to redeem my money, however, they did not give it to me as they say there is no market. Have I lost all my money? What can I do?

M.B., via e-mail

A: You haven't lost your money. But you have become yet another victim of the national credit crisis, says Bill Larkin, of Cabot Money Management in Salem, Mass.

By way of background, Mr. Larkin notes that seven-day auction-rate securities are alternative short-term investments that are offered in three basic forms: taxable, tax-advantaged, and tax-free. These loans are collateralized by the securities held in the mutual fund's portfolio, which allows the security to hold a triple-A credit rating. Because these securities are collateralized, preferred shareholders are first in line to be paid in the event the fund needs to be liquidated.

The problem is that a number of large banks have decided to no longer support any auction-rate leveraged loan operations. With the banks already straining from the credit crisis, they decided they would step away from facilitating these auctions. Their lack of participation caused auctions across all spectrums of securities that have their weekly rates set to be unsuccessful.

The failure of these auctions does not mean your securities defaulted, says Mr. Larkin. It just means a proper auction that determines a fair short-term rate can no longer be organized.

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