Holders of Auction-Rate Debt Have Choices, but Few Solutions
Following her broker's advice, Cecilia Walsh put her entire $375,000 divorce settlement into auction-rate securities last December, planning on using the money for her day-to-day needs.</br></br>Yet before she ever withdrew a penny from the account, the auction- rate-debt market froze up, and Ms. Walsh, a 47-year-old actor in Delray Beach, Fla., was unable to withdraw any of her money. Her broker, UBS AG, gave her a margin loan secured by her account so that Ms. Walsh could pay her living expenses. But UBS later marked down the value of the securities in her account and has demanded that she repay part of the loan.</br></br>In the four months since auction-rate securities stopped trading normally, investors like Ms. Walsh have been taking out loans, selling their securities at big discounts, filing arbitration cases against their brokers, or simply waiting and hoping that the market will start functioning again. The one thing they haven't found is an easy way to get their money back.</br></br>For decades, individuals and companies bought auction-rate debt from municipalities, charitable organizations, student lenders and closed- end mutual funds. The securities had long-term maturities but functioned like a short-term investment, paying interest rates that were reset in weekly or monthly auctions conducted by Wall Street firms. Brokerage firms and financial advisers pitched them to investors as a safe place to stash one's cash and collect a higher yield than a money-market fund offered, often tax-free.</br></br>As a result, the $330 billion auction-rate securities market attracted many investors who were risk-averse or, like Ms. Walsh, knew they would need the money in the near future. But beginning in February, as the subprime-lending crisis spread to affect nearly all areas of the credit markets, auctions failed to attract sufficient bidders. Wall Street firms stopped supporting the market, causing it to freeze up and blindsiding thousands of small investors.