Bloomberg: Auction-Rate bond market in Collapse - Citigroup Flees

[El Pinko]

http://www.bloomberg.com/apps/news?pid=20601087&sid=aXXucptLVGuc&refer=worldwide


Auction Debt Succumbs to Bid-Rig Taint as Citi Flees
By Darrell Preston

Feb. 21 (Bloomberg) -- The collapse of the auction-rate bond market, where state and local governments go to raise cash, demonstrates that regulators are no match for Wall Street. Hundreds of auctions have failed this month, sending borrowing costs as high as 20 percent because dealers from Goldman Sachs Group Inc. to Citigroup Inc., UBS AG and Merrill Lynch & Co. stopped using their own capital to support the sales. Regulators, who allowed the manipulation of bids and lack of information to persist even after two probes in the past 15 years, are now watching a $342 billion market evaporate at the expense of taxpayers.

....

No `Backstop' ``The banks were the backstop,'' said Sharon Binnun, the chief financial officer of Citizens. ``If you had more sell orders than buy orders, they'd pick up the difference and you wouldn't have a failed auction.''

Officials at Goldman, Citigroup, UBS and Merrill declined to comment. All the firms are based in New York, except UBS, which is in Zurich. UBS told its brokers this month that it won't buy bonds that fail to attract enough bidders, and Merrill said it was reducing its purchases.

Auction-rate securities are long-term bonds whose interest resets every seven, 28 or 35 days at bidding run by a dealer who collects a fee of about 25 basis points. Unlike Treasuries or stocks, there is no daily source of information about auction- rate bonds. Issuers have relied on banks to be buyers of last resort when bidders couldn't be found at their auctions.

[Mojorabbit]

1. That is one scary article. n/t

[Richard Steele]

2. Everything is fucked up; it's all coming down...

and it takes a worried man
to sing a worried song!


http://www.youtube.com/watch?v=eUrhcwm34Uk

[grasswire]

3. I'm worried now...... (eom)

[jannyk]

4. Oh my, that's very very scary. Why is this not on the greatest page? K&R

[Karenina]

6. It will be now! Another snippet:

`Ugly' Market

From 1984 through 2006, only 13 auctions failed, typically because of changes in the credit of the borrower, according to Moody's Investors Service. There were 31 failures in the second half of 2007, and 32 during a two-week period beginning in January. That compares with more than 480 failures yesterday alone, according to figures compiled by Deutsche Bank AG, Wilmington Trust Corp. and Bank of New York Mellon Corp.

``It's ugly,'' said Luis I. Alfaro-Martinez, finance director for the Government Development Bank of Puerto Rico, which saw the rate it pays on $62 million of debt rise to the maximum of 12 percent set out in documents governing the bonds, from 4 percent at a Feb. 12 auction handled by Goldman. ``It's getting uglier.''

[malaise]

5. When banks are allowed to loot taxpayers

this is what happens. The robber barons have taken over. Is it fascism yet?

[NGinpa]

7. Is it the rate that resets or the principle value at that moment

Auction-rate securities are long-term bonds whose interest resets every seven, 28 or 35 days at bidding run by a dealer

I am no maven on all this, but don't bonds tend to have set interest rates for their duration?? Isn't it the principle value that fluctuates with interest rate changes at least until the bond matures when it does pay the face value principle back. Isn't that the benefit of bonds that they have a fixed interst rate and you can get the principle back at maturity?? Are you conceptually mistaken here or please clarify?