AUCTION RATE SECURITIES (ARS) MARKET COLLAPSE
Auction Rate Securities (ARS) are a type of bond issued by municipalities and private businesses that serve a public purpose, such as hospitals, electrical companies, school districts, and transit authorities along with other governmental and quasi-governmental entities. Banks attracted many issuers to issue ARS with the promise that these securities provided the benefit of a short term interest rate on a long term bond. The savings as opposed to if they issued VRDOs was about fifteen basis points, but when the issuers are bringing to market tens or hundreds of millions of dollars of issuances this amount can lead to significant savings. Coincidently, for the banks, ARS issuances were considerably more lucrative than normal bond issuances.
The interest rates paid by the issuers were usually reset at weekly or monthly auctions with a penalty rate paid if there were not enough buyers of the ARS at each auction. These penalty rates usually were significally higher than the rate of 80% of LIBOR which is the amount represented by the banks and the common interest rate paid by ARS issuers. However, the penalty rates were in the range of 12% to 15 %, thus rates commonly seen on credit card balances.
However, in February of 2008, this $300 billion dollar ARS market abruptly collapsed causing losses in the tens of billions of dollars for the issuers. See https://www.bloomberg.com/news/2012-12-14/auction-rate-costing-local-taxpayers-9-6-billion-muni-credit.html.
We represent numerous issuers of ARS and in the cases we have filed we have alleged that the banks handling the auctions knew the market depended on their support bids for unwanted securities and failed to disclose that information to the issuers. Thus, the market collapsed when the banks chose to stop placing their support bids in the auctions.
Neither he issuers nor their bond counsel could have ever known that this was happening as the auctions were opaque and there was nowhere they could have looked to see what the banks were actually doing.
Christopher Ligori & Associates along with Levin, Papantonio, Thomas, Mitchell, Rafferty and Proctor P.A.; Fishman, Haygood, Phelps, Walmsley, Willis and Swanson L.L.P.; Schneider, Wallace, Cottrell, Brayton, Konecky L.L.P., and Lucas, Green and Magazine have been pursuing these cases for issuers. Collectively, we represent issuers of over ten billion dollars in Auction Rate Securities issuances at present. We are continuing to pursue these cases and the number of ARS issuers that have become clients is increasing all the time.
For more information regarding the collapse in the Auction Rate Securities market, the damages to the insurers, or the types of issuers who may have a claim, please call Christopher Ligori & Associates at 877-444-2929.