I view it as problematic that the investment banks did not disclose the degree of backstopping that was done in the past. Backstopping is what kept ARS fuctioning as an alternative to money market accounts, because failures virtually neve happened until now. Now that the Investment Backs discontinued that practice, spreads between ARS verses MM are going to be substantially higher than before, even if things settle down, because investors who need short-term access to the cash are no longer able to view them as a money market alternative.

By the way, high grade muni ARS bonds that I own have a Mandatory Tender clause in the offering statement, which means that if two consecutive auctions fail, then they will attempt to remarket the securities as fixed income bonds (and buy back the existing bonds from current holders at par).

I get what you’re saying though JLP, they thought they were parking them at a safe place, until they can setup their own wealth managers to take care of the money… and I suppose in hindsight they should have asked Mr.Liu to find a “professional investment consultant” as Lehman Bros. put it.

Imagine if they had went w/ only Lehman..

But since the majority of auction-rate securities are backed by munis, I still think my thesis is correct: blame subprime (or the relevant underlying securities) for “unsafeness,” not the auction process or auction-rate securities in general.

And I still think the Mahers should have taken a little time to understand their investments, even if they were paying other people to run their money.

If, like some other auction-rate securities, the bonds increase in yields (like Port Authority’s 20% yield), then the issuers will likely restructure their capital structure, at which point they’ll still pay back the Mahers. Until then the Mahers will earn the higher yield on the bonds they hold.

This is actually a win-win situation for the Mahers unless they need the money right now, and given that they still have $750MM elsewhere, I don’t think that’s a problem.

The only way that the auction-rate securities they bought aren’t “safe” would be if the underlying bond issuers are not credit-worthy. But that’s unlikely to be the case if the issuances are munis (the most common auction-rate securities) or even repackaged student loan debt. I guess Lehman could have put the Mahers’ money into some exotic debts, but the article doesn’t make that clear.

Finally, the last bit in the article about companies like 3M, US Airways, and Bristol-Meyers Squibb taking writedowns on auction-rate security is a bit misleading. There’s a strong possibility that these companies are writing down their debt to claim a tax benefit in the current year or to boost earnings growth the next year, when there is no such writedown. I’m not certain of the motivation behind the writedowns – but this was the first thing I thought of.

That’s not the point. The point is that they thought they were in something safe, when in reality, they weren’t.