Auction Rate Security Maket Mess

Brokerage-firm clients buy auction-rate securities that are issued by mutual-fund companies, student-loan companies, nonprofit entities, schools, museums and municipalities to raise cash. In all, it is a $330 billion market. Many in the industry say it will take months to fully fix the mess. An executive at one firm said because there is no secondary market in which to sell these securities, it is almost impossible to put a realistic price on them. UBS and Goldman Sachs Group Inc. are among the firms that have decided to mark down the value of these securities on client statements. Although there is no evident market for these securities, firms have used internal models to estimate a price. Markdowns vary, but most are between 3% and 5%. This is a very painful issue for clients," said Marten Hoekstra, UBS's head of wealth management. The Swiss bank has also marked down by $800 million the value of nearly $11 billion of auction-rate securities it holds in its own trading book. Of the $330 billion market for these securities, closed-end funds issued about $65 billion of the total; firms like Eaton Vance Corp., BlackRock Inc., Legg Mason Inc. and Nuveen Investments were among the primary sellers. When the market seized up, brokerage firms, fund companies and regulators began talking to see if there was a way to refinance these securities and get owners of the securities out at full value. One idea is for banks, for a fee, to provide financial backing to make the investments more liquid and secure. The problem is banks are reluctant to make such guarantees these days. The approach would also likely require the cooperation of regulators and the Internal Revenue Service, because there could be complex tax implications.