UBS has been charged with manipulating the auction-rates securities market before its collapse.

Massachusetts securities regulators today are expected to file civil fraud charges against UBS Financial Services Inc. for allegedly selling investments it claimed were as safe as cash even though the Swiss firm knew they were risky, according to a state official briefed on the case.

The complaint, to be filed by the state Securities Division, is expected to allege that UBS knowingly let its brokers sell so-called auction-rate securities – a type of bond issued by nonprofits and municipalities – without warning investors that they might have trouble getting their money back, the Massachusetts official said.

UBS spokeswoman Karina Byrne said the firm had not yet been notified of any complaint. “UBS has been providing information to the Massachusetts Securities Division and we are committed to helping our clients who have been adversely affected by the unprecedented marketwide loss of liquidity in auction rate securities,” she said.

The Globe previously reported that UBS brokers were still making sales early this year, when the firm knew the multibillion-dollar trading market for these securi ties was on the brink of collapse – another victim of the credit crisis that was then sweeping financial markets.

The market did indeed collapse on Feb. 13 and has remained closed since, leaving trapped investors with an estimated $220 billion worth of securities they cannot sell.

The state is looking to force UBS to return all investor funds in these investments and will seek to have the firm pay a fine.

Last month, UBS agreed to buy back $37 million worth of these securities sold to 17 Massachusetts towns and cities and to the Massachusetts Turnpike Authority, under an agreement with Attorney General Martha Coakley.

Little known before the market froze, auction-rate securities have ensnared the savings of thousands of investors across the country, many of them retirees who put their life savings into the investments on the advice of their brokers.

As reported by the Globe, UBS investment bankers were warning some large clients of the market’s looming problems while, at the same time, continuing to permit brokers to sell the investments to individual investors without providing them with similar warnings.

As a result, clients seeking risk-free investments purchased securities they were led to believe would be as safe as money market funds. Indeed, even many brokers from UBS and other investment firms appear to have been surprised by the market’s shutdown.

Massachusetts regulators have been investigating UBS and two other firms, Banc of America Investment Services Inc. and Merrill Lynch & Co., since March, shortly after the auction-rate markets failed. Those investigations are ongoing, according to the state official. New Hampshire regulators also are probing UBS.

Auction-rate securities are primarily the long-term debt of student lenders and municipalities. They traded for years in private markets run by brokers, where weekly or monthly auctions reset the interest rates on the securities. Typically, those rates were a little higher than those of money-market funds.

What most investors didn’t know was that the auction-rate market functioned only as long as buyers and sellers placed bids for the bonds on a routine basis. The brokers who ran the auctions, including UBS, in February decided to stop trying to keep the auctions going by using their own funds to buy the bonds.

One of the many people interviewed by state investigators was Richard Stahl, a retired auto dealer in Hollis, N.H., whose ordeal was detailed by the Globe. He has $1.4 million tied up in auction-rate securities, half in bonds issued by a New Hampshire student lender. That student lender had been advised by UBS, its investment banker, to offer a sharply higher interest rate to generate demand for its bonds if the market began to shut.

The lender, the New Hampshire Higher Education Loan Corp., agreed to the higher rate deal in mid-December. It did so “at the suggestion of UBS Securities LLC, its investment banker and broker-dealer, in order to respond to disruptions in the auction-rate securities market and attempt to prevent ‘failed auctions,’ ” the lender said in a letter to investors on its website.

But individual investors have said that UBS did not share its concerns about the market with them. Weeks later, in January, a UBS broker sold the New Hampshire group’s bonds to Stahl, promising him the investments were as safe as cash. Stahl said he received no warning about the bonds’ risks.

In February, Stahl learned that he could not sell the bonds because the trading market had closed.

In May, UBS stopped listing these investments under “cash” on customer statements and started listing them under the category of “fixed income,” or bonds. The change is an acknowledgement that the securities were not equivalent to cash, but in fact carried risks, as do bonds, which can fluctuate in value.

UBS also has been marking down the value of these investments on customer statements. The firm has reduced the value of some student-loan and other auction-rate bonds by at least 5 percent, and sometimes by much more, according to customer statements reviewed by the Globe.

Lance Pan, director of investment research at Capital Advisors Group Inc. in Newton, said UBS and other investment banks should buy back the securities. “Investment bankers can and should take them back on the balance sheet. I don’t see why they don’t do that, for business reasons,” Pan said.
–
Beth Healy can be reached at bhealy@globe.com

se.

By Beth Healy

https://archive.boston.com/news/local/massachusetts/articles/2008/06/26/state_set_to_allege_securities_fraud/

Wall Street firms may have led their own brokers to believe auction-rate securities were safer than they really were, by labeling them as cash investments and failing to warn brokers of their risks, according to customer records and interviews.

By Beth Healy

https://archive.boston.com/business/markets/articles/2008/06/17/brokerage_practices_draw_criticism/

At last week’s Treasury Management Association of New England conference, Capital Advisors Group Director of Investment Research Lance Pan urged the audience of corporate treasurers and money fund professionals attending his “Check-Up on Institutional Money Market Funds Presentation to, “preserve the sanctity” of the money fund. “It’s truly a great product,” he said.

Pan discussed past episodes of troubles, but said, “No other securities product can claim the level of recognition and success of the money market fund.” He explained that money funds “price artificially at $1.00” and in exchange they “handcuff themselves” in regards to what investments they can purchase.

He poignantly reminded attendees that, “Liquidity is a state of mind,” explaining the dangers of an unanticipated run on assets. Of the only single episode of a fund “breaking the buck” in history, Community Bankers, Pan said the fund “broke the buck because the sponsors allowed it to break the buck.” Pan also said, “There needs to be liquidity that’s not market dependent.” He cited the pain that SIVs caused and reminded listeners of the “formal procedure” that the FDIC mandates bank-affiliated money fund advisors go through “before the bank can hand over the blank check.”

Finally, Pan told the Boston audience, “At the end of the day a money fund does deserve to be an important part of a treasury portfolio.” But he says to, “Do your due dilligence and make sure the money is properly managed.” He added to large investors, “We can influence how they manage,” citing examples of funds changing investment behavior based on the concerns of investors.

https://cranedata.com/archives/all-articles/1610/

Russell Paquette liked auction-rate securities (ARS) as much as the next treasurer. At Recreational Equipment Inc. (REI) in Kent, Wash., he had been particularly attracted to those backed by student loans. “They were AAA-rated, over-collateralized by 30% and roughly 97% guaranteed by the Department of Education,” the REI treasurer points out. But when asset-backed investments began to lose their auction market liquidity, an alert Paquette bailed out of ARS investments. “We exited that market in December and January,” he notes. “We were fortunate.”

A neighbor down the road in Redmond, Wash., also invested in the ARS market and escaped intact. In 2006, when the SEC ruled that auction-rate paper no longer qualified as a cash equivalent, Microsoft Corp.’s treasury saw an opportunity in the market dislocation that followed and decided to buy. “At a time when others were selling, we went overweight in auction-rate securities, relative to our benchmarks,” reports Microsoft treasurer George Zinn. It was a big bet. “We went overweight by billions of dollars,” he explains. “That allowed us to reap considerable value and outperform our benchmarks by taking advantage of the dislocation. We bought auction-rate for all our portfolios where it was permitted, including our liquidity portfolio.”

But in early 2007, Zinn and his team of CFAs became leery of credit risk and began to pare down Microsoft’s ARS holdings. Then last summer, his staff noticed collateral in Microsoft’s securities lending portfolio that it wouldn’t buy for its own portfolios. It called in its two securities lending agents and asked for a fix. “One offered to rewrite its guidelines and take back the securities we didn’t want,” Zinn recalls. “The other one wouldn’t. We ended that relationship, marked the collateral to market, sold it and took a $100,000 loss. When I saw that an investment bank would burn a relationship over $100,000, I knew there were larger issues down the pike.” By the end of the year, Microsoft’s ARS investments were down to “the equivalent of zero,” Zinn says. “We navigated the troubled waters superbly.”

Unfortunately, most treasurers have a much sadder story to recount when it comes to the fate of their ARS bet in liquidity investment portfolios. “I’ve been told that only about 20% of the organizations that invested in auction-rate securities escaped unscathed,” notes REI’s Paquette.

The pounding was so unsettling that some market veterans now predict treasurers will be inclined to quit the cash investment game altogether. “This is a game-ending event,” insists Lee Epstein, president and CEO of Money Market One, a San Francisco broker-dealer specializing in corporate cash investments. “The cash investment game treasury staffs have been playing for the past 25 years is over. People thought they could pick up a few basis points of yield without taking real risk. Well, the free lunch ain’t free.”

Epstein is not alone in this analysis that treasurers and treasuries feel burned and, particularly after the Bristol Myers Squibb treasurer and assistant treasurer were pushed out in February for losing $275 million on ARS, are recognizing what is at stake when they take investment risks. “Treasurers are finally throwing in the towel,” suggests Anthony Carfang, founding partner of Treasury Strategies Inc. (TSI).”They’re deciding it’s not their job to manage an investment portfolio. Once they saw that they could not depend on the rating agencies to keep them apprised of credit risk, they’re moving to institutional money funds or turning to outside managers to do the investing for them. The big fund managers can do their own credit analysis and don’t have to depend on rating agencies.”

But is this just another case of the pendulum swinging too far the other way? At the end of the day, whether treasurers handle the day-to-day or hand it over to an investment manager, it won’t just be the investment manager’s head on the line if cash strategies head south–the treasurer’s and CFO’s will be right next to the manager’s. The key, say experts, is not to run portfolios on auto-pilot–expecting that a credit rating awarded months earlier is necessarily holding up. What CFOs and treasurers should be doing and are doing, according to veteran cash managers like Ron Hart, a corporate cash investments group director in Citigroup Global Markets Inc., is re-engaging in the investment activity. “Advice now matters to them,” Hart reports, “and they want it from people with a long history in the corporate cash area.”

The carnage from the subprime spilloff has no doubt taken a toll. In March, Treasuries Strategies released a survey showing liquidity falling for the first time in nearly 10 years–down by $250 billion at $5.25 trillion domestically. This, however, follows an unprecedented ascent of roughly $1.6 trillion in the short eight years between 1999 and June 2007, and TSI’s Carfang is quick to point out that corporate cash is still plentiful, Carfang notes. “Left to its own devices, the market will recover its balance,” he says. “The problem lies in the financial economy, not the real economy.”

In the meantime, a lot of rearranging the deck chairs is underway. In Treasury Strategies’ Flash Surveys, auction-rate securities comprised 4% of the corporate liquidity portfolios of those surveyed last July. By yearend, it was down to 2%. In the asset-backed commercial paper shakeout, holdings in these same portfolios fell from 15% to 3%, Carfang reports. “That’s a redistribution of $500 billion in funds,” he notes. Before the shakeout, investors were holding $350 billion of outstanding auction-rates, considering them 7-day or 35-day instruments, he adds. The shift within portfolios to more conservative investments means that, overall, corporate treasurers have reallocated more than $1 trillion, he observes.

The flight to money markets has disrupted those relatively tame markets as well. The spread between a prime fund and a Treasury fund, normally 10 to 15 basis points, has been more than 200 basis points at times, notes Kirk Black, liquidity management service executive at Bank of New York/Mellon. The yield on Treasury funds is so low that many treasury investors choose government funds as a reasonable compromise between safety and yield, he adds.

Corporate investors who are confident in their due diligence and stay with high-quality prime funds can pick up 30 basis points over a government fund and 200 basis points over a Treasury fund, Black points out. The flight to money funds has pushed their assets up to $3.4 trillion, an all-time high and an annual growth rate of about 40%, he notes.

How do you choose a safe money fund? Carfang has several suggestions. First, pick a fund that has at least $5 billion in assets. That means that smart investors are parking their money there. Second, invest only in funds that grew in the last six months of 2007. That shows that they’ve passed muster with other credit-conscious investors. To the extent that AAA prime money funds had paper that was tainted with credit or liquidity concerns, they have now had time to flush most of that paper out of their funds and replace it with safe, highly liquid alternatives, he explains.

Treasury Strategies does not recommend reflexively rushing to the quality of Treasury funds because the exit strategy no longer carries low risk. So much money has rushed into low-yielding Treasury funds, Carfang explains, that once the market turns and rates start to rise there will be a rush among investors to leave, which will force those funds to sell securities at a loss in a rising-rate environment. This could well result in a loss of principal to investors, Carfang explains. “Don’t jump into a crowded elevator,” he advises.

Even treasury investors who stay in safe institutional money market funds are finding they need to watch both tax-exempt and taxable funds for credit issues. For example, Eastman Chemical Co., based in Kingsport, Tenn., normally would keep its $400 million of liquidity portfolio in tax-exempt funds, reports John Nypaver, manager of global cash management. When taxable funds showed up with some holdings in SIVs and CDOs, Eastman inquired and stayed in tax-exempts. But when concerns arose about bond insurers earlier this year, Eastman switched to taxables, which by that time looked safer. Now, it is considering a swing back to tax-exempts, Nypaver says.

Another important item on a checklist is to revisit the company’s investment policy–something that no doubt many boards and senior managements are requiring anyway. “We’re seeing much greater emphasis on enforcing adherence to investment policies and guidelines,” says Elyse Weiner, global product head for liquidity and investments at Citigroup. “They’re centralizing investment as much as possible so that operating entities can’t stray from those guidelines.”

As the credit crunch persists, despite aggressive Federal Reserve efforts to bolster faltering financial institutions and cut the cost of lending, “the whole concept of liquidity efficiency and working capital management is getting renewed emphasis,” Weiner says. Companies are “looking at supply chain finance for ways to speed up cash velocity through the sales cycle, hoping to find creative ways to reduce their working capital investment in days sales outstanding. They’re tapping bank lines, including back-up lines, when necessary but only after they’ve searched internally for pockets of cash they can grab,” she adds.

Beyond using money funds, the liquidity squeeze is driving money to outside investment managers, according to consultant David Stowe, director and head of the risk management practice at Strategic Treasurer LLC in Atlanta. When times were good, many treasurers wanted to hire a senior analyst to manage the portfolio and keep the 5 to 10 basis points a money manager would charge in the corporate coffer. Now, they’re more willing to pay that price to get in-depth credit analysis, he explains.

For cash that’s tied up in illiquid securities and can’t be swept into a money fund or turned over to an outside manager, the options are grim. The first thing treasury cash investors need to do, Epstein says, is read those prospectuses now and find out just what they’re holding–something easier said than done. Even if they came in and worked on weekends doing that reading, the typical treasury analysts and cash managers wouldn’t understand what they’re reading, and the outside experts who can understand the prospectuses are scarce and expensive, he notes.

Treasury investors holding unexpectedly illiquid paper need to analyze their holdings and other sources of liquidity to determine whether holding onto some and riding out the market turbulence may be a smarter course than disposing them at fire-sale prices, Stowe advises.

Just don’t be desperate. Fire-sales represent opportunities, primarily for hedge funds out to scoop up bargains, advises Lance Pan, director of credit research at Capital Advisors Group in Newton, Mass. Don’t accept the first offer you get, even if you’re eager to unload some bricks, he says.

The situation is at least as painful for treasuries that issued auction-rate securities, one of the asset classes caught in the liquidity freeze. An institution Carfang works with is currently struggling with that very situation. “They issued $20 million of auction-rate debt and paid the underwriter $1 million in fees to put it out there,” he reports. “They also paid a small fortune to insurance companies to provide credit enhancement. They expected to amortize that $1 million over 30 years. Now they’re paying 12% on the auction-rate debt instead of 4%. They can redeem the debt and take the big hit for all that front-end expense, or they can continue to take the small hits from the high coupon payments and wait for a successful auction. They’re tempted to tough it out for a few months and hope that equilibrium comes back to the market.”

Until bidders return, auction-rate securities are behaving like the long-term obligations they truly are, and cash investors are being pressured by auditors to reclassify them as long-term assets, Carfang says, assets that usually put the cash portfolio in violation of investment policies. In some cases, investors have to write down the investment, even if they expect to be made whole eventually. “It’s a treasurer’s nightmare,” he notes.

What’s needed now for cash investment portfolios is not simply valuation, which looks at what a buyer is willing to pay, but evaluation, which looks into the rights of the investor as spelled out by the prospectus, Epstein insists. “You need to find out where you are,” he observes. “You need to be prepared to argue with your auditors, and you need an exit strategy, which in many cases will not be pretty.”

By RUSS BANHAM

https://www.treasuryandrisk.com/2008/04/01/the-new-treasury-diet-keep-it-simple

Investors stuck with unwanted auction rate securities may soon find a way out.

Independent trading networks are stepping in where Wall Street’s major banks fled, creating secondary markets for trading these securities, once viewed by wealthy individuals and other investors as being as good as cash. Lately, however, they have become about as illiquid as granite.

Trading was set to begin Tuesday at Restricted Stock Partners, a New York-based alternative trading site that specializes in thinly traded securities like warrants and restricted shares. Another site, New York-based the Muni Center, which specializes in municipal bonds, is also getting ready to flick the on switch.

Needless to say, there are a whole bunch of hedge funds and other distressed-securities buyers lined up to pounce. Restricted Stock Partners, which is backed by minority investor Pequot Venture, a unit of Pequot Capital, said it has 60 issues set to trade from a number of sellers and has interest from a variety of buyers.

But the sellers aren’t going to get par value, and possibly not by a long shot. Already, interested buyers not using these trading sites are demanding discounts of 20% to close to 50%, according to Lance Pan, director of investment research at Capital Advisors Group in Newton, Mass. But the new sites can be a way out for investors who need the cash immediately.

That includes not just wealthy individuals but companies that invested in auction rate securities believing they were essentially cash-on-demand securities, Pan said.

The moves come as the finance industry and Washington lawmakers try to shake loose the $330 billion auction rate market, which has frozen up in the credit crunch, leading to significantly higher borrowing costs for major municipal bond issuers like the Port Authority of New York and New Jersey and the Pennsylvania Higher Education Assistance Agency.

Auctions are failing, leaving investors stuck with securities they can’t sell, and issuers looking at far higher interest rates. Port Authority, for example, saw the interest rate of its auction rate bonds soar to 20% from 4% last month after a failed auction. The Pennsylvania Higher Education agency, the second-largest municipal auction rate issuer, said it would stop making student loans after being forced to pay $24 million in extra interest.

Wall Street’s major banks are supporting the concept of a secondary market. Facing their own capital constraints, the major dealers began letting auctions fail last month after refusing to step in and buy in the absence of bidders. Banks, which once supported the auction rate market in this way, face another $30 billion of write-downs in the first quarter after more than $120 billion in the last six months and can no longer afford to extend their balance sheets.

“Near term, the dealers don’t have a solution,” said Pan. They can’t let some investors out at par and make others take a discount, so they abandon everyone.

The Securities Industry and Financial Markets Association, otherwise known as SIFMA, held a conference call with broker-dealers and electronic networks last week to talk about alternatives for solving the crisis, according to some people on the call.

Of course, that doesn’t mean the auction rate market will roar back to life. “The auction rate market is discredited and not likely to make a comeback,” said John Craft, director of business development at the Muni Center, which was founded in 2000 as a site to trade municipal bonds. Merrill Lynch , Morgan Stanley and Citigroup are its original backers.

These securities, invented in 1988, became a popular investment in recent years because they offered investors better short-term yields than other cash-like investments, and issuers, like city treasuries, better borrowing rates.

Auction rate securities are long-term debt, typically municipal bonds or corporate bonds, that act like short-term debt because their interest rates are set every week or so by auction. They are sold in increments of $25,000.

The credit market turmoil has thrown this system into chaos. About half of the $2.4 trillion in municipal bonds outstanding are backed by bond insurance, and the bond insurers are in turmoil after questions about their capital positions and triple-A ratings.

The possibility that one or more of the bond insurers would lose their triple-A credit rating made investors rush to sell their auction rate holdings, but sent any would-be buyers, including the broker-dealers themselves, fleeing from the market.

Last month, 80% of auctions failed. As a result, some $166 billion worth of municipal and corporate debt is being converted to fixed-rate terms, which are more costly for issuers but certainly not as costly as, say, 20% interest. Barry Silbert, chief executive of Restricted Stock Partners, said about 10% to 30% of the $330 billion worth of auction rate securities out there may never trade at par again.

“We’re not going to save the auction rate market,” Silbert said. “But to the extent we can provide liquidity to holders, we’d like to help.”

By Liz Moyer, Forbes Staff

https://www.forbes.com/2008/03/04/bonds-ecns-auctions-biz-wall-cx_lm_0304auctions.html

https://www.financialweek.com/apps/pbcs.dll/article?AID=/20080303/REG/889107137/1007/COMPENSATION

A U.S. Treasury plan to freeze payments for subprime mortgage holders fired up demand for Frannie Mae and Freddie Mac mortgage and agency debt on Friday, as it assuaged fears of massive loan defaults and helped erase yield premiums racked up in the last week’s panic selling.

“The market was so pessimistic about the prospect of mortgage credit in general that good news of this magnitude was definitely a huge shot in the arm,” said Lance Pan, credit research director at Capital Advisors Group in Newton, Massachusetts.

 

By: Michael Quint

More than a year after 15 securities firms settled claims of manipulating auction-rate bonds, the $360 billion market remains as opaque as ever.

Investors can’t get basic information about trading in their securities, like the interest rate. Qwest Communications International Inc. and Synaptics Inc. haven’t been able to unload the debt when they wanted to, regulatory filings show. Borrowing costs on the $270 billion of auction bonds sold by state and local governments have climbed an average 13 basis points compared with notes that aren’t subject to periodic sales, according to the brokerage industry’s trade group.

The collapse of debt backed by subprime mortgages that forced banks to report more than $50 billion of losses and writedowns this year is infecting the market for auction securities. Investors are concerned because brokers can advise bidders on what they should pay and the U.S. Securities and Exchange Commission allows dealers to use their inside information to compete with bondholders.

“When you buy auction securities, you are beholden to a broker,” said Adam Dean, president at SVB Asset Management, a San Francisco, California, firm that manages about $6 billion of corporate cash accounts. While Dean doesn’t buy the debt because of the risk that it can’t be readily converted to cash, “our clients are constantly being solicited by brokers,” he said.

Unlike Treasuries or stocks, there is no daily source of information about auction-rate bonds, floating-rate securities whose interest rate is reset though periodic bids, typically every seven, 25 or 28 days.

SEC’s Haines

Investors can’t compare holdings with other auction securities except with weekly indexes maintained by the Securities Industry and Financial Markets Association, the U.S. bond market’s trade group. More timely information is held by brokers who determine rates by figuring out the highest yield that will result in all the bonds being sold.
“Investors and issuers would be well-served if they know the interest rate on these securities,” said Martha Haines, head of the SEC’s Office of Municipal Securities. “They can see where they stand relative to other auction securities.”

Securities firms paid $13 million to settle charges of bid- rigging in auction-rate bonds last year. While the SEC required banks to disclose that they may use insider knowledge to place bids, they don’t have to say how frequently they bid or how much. Dealers also aren’t obligated to disclose rates on auction debt when the securities trade.

“Level Playing Field”

“The auction market as it is now isn’t a level playing field because it denies investors the information they need to assess their liquidity risk,” said Joseph Fichera, chief executive officer of Saber Partners, a New York-based financial adviser.

Auctions for about $6 billion of securities have failed in the corporate market because there weren’t enough bids, according to Lee Epstein, the CEO of Money Market One, a San Francisco brokerage.

Municipal bond insurers, including Ambac Assurance Corp. and MBIA Insurance Corp., accounted for $1.85 billion of failed auctions, according to Fitch Ratings. At least nine collateralized-debt obligations included securities whose auctions have failed, according to court documents.

When auctions fail, the yield is set at a maximum rate specified in sale documents. That can be as high as 12 percent for municipal tax-exempt debt issued by the New York City Municipal Water Finance Authority and as little as 1 percentage point above wholesale bank deposits for corporate securities, bond documents show.

“Investors are nervous that if there aren’t enough buyers at the auctions, they have to rely on bids by dealers,” said Richard Davis, an assistant commissioner at the Utah State Board of Regents.

Utah Rates Rise

Rates for the Salt Lake City-based student-loan agency jumped more than 1 percentage point to 6.40 percent in August. While the rate fell to 5.05 percent this month, it’s still 40 basis points more than the London interbank offered rate, a benchmark for short-term lending. Before August, the debt yielded about 5 basis points less than the benchmark. A basis point is 0.01 percentage point. The difference means $450,000 in extra interest each year on borrowings of $100 million.

There is little chance of failure in auctions of municipal bonds, according to Citigroup Inc. municipal strategist George Friedlander.

“In our opinion, there is no parallel risk on municipals,” though “the short-term muni market has suffered a bit of guilt by association that will take time to recede,” he wrote in an Oct. 5 report. The New York-based bank was the biggest underwriter of auction securities last year, according to Thomson Financial.

Can’t Sell

Investors such as corporate cash managers buy auction securities as an alternative to money market mutual funds and Treasury bills. One-month taxable auction securities yielded an average 5.27 percent on Nov. 14, according to the trade group index, compared with 3.87 percent for four-week Treasury bills.

A poll of corporate cash managers in May showed that one- third invested in auction-rate securities, according to a report prepared by Citigroup Inc. for the Association for Finance Professionals, whose 16,000 members are mostly corporate treasurers and finance officers.

Holders such as Qwest, the Denver-based local phone carrier in 14 western U.S. states, and Santa Clara, California-based Synaptics, a maker of touch-screen devices for cell phones, have been unable to unload securities because of auction failures, according to SEC filings.

Apex Silver Mines Ltd., a mining company based in Denver, took a loss of more than $20 million in the third quarter to write down the value of $71 million of failed auction securities, according to the company’s quarterly SEC filing.

Disclosing Risk

MetroPCS Communications Inc., a Dallas-based mobile phone company, filed a lawsuit over the failures, alleging in Texas state court that New York-based Merrill Lynch & Co. failed to disclose the risks and ignored the company’s instructions to invest in securities that can be readily sold.

Terez Hanhan, a spokeswoman at Merrill, declined to comment about auction-rate deals run by the brokerage.

The Municipal Securities Rulemaking Board, the self-regulatory group that polices the municipal bond market, is studying disclosure of interest rates on auction securities when they trade, according to Frank Chin, chairman of the rulemaking body. Providing additional information “will be the subject of additional dialog with the SEC,” said Chin, who is also director of public finance at Citigroup, the biggest U.S. bank.

Auction-Rate Indexes

Indexes of auction-rate securities, created by bankers at the time of the SEC settlement, are no substitute for information about specific issues, said Saber’s Fichera. They are based on two days of auction results from the previous week and can be at odds with information available to bankers.

Investors would have more confidence if they had more information, said Lance Pan, director of research at Capital Advisors Group, which oversees $7.5 billion of cash in Newton, Massachusetts.

Bondholders want to know the range of bids on auction securities and whether dealers are stepping in, Pan said. Investors also need to know the ratio of bids to securities available.

“Bankers are pretty hush-hush about auction results,” Pan said. “We just can’t get the information we need to evaluate the risks.”

U.S. agency and mortgage debt prices firmed but lagged Treasury market gains on Monday on widening subprime market worries that fueled demand for safer assets.

Agency and MBS spreads expanded as Treasuries rallied on new lows in the benchmark ABX index, used by investors to hedge subprime mortgage risks.

Investors are skittish even in the safer spreads products, despite two days of narrowing at the end of last week when some accounts bought at cheapened levels.

“We’re really staying on the very defensive side,” said Lance Pan, director of credit research at Capital Advisors Group in Newton, Massachusetts.

Over much the last decade, supposedly conservative cash investors steadily increasing their risk appetite was a widespread phenomenon. Recent credit developments in the mortgage and debt markets helped raise risk awareness levels. This paper summarizes the risk behavior of corporate cash and money market fund managers into eight broad categories. Corporate investors are advised to check for these potholes as an ongoing exercise. The eight potholes to avoid are: overconfidence in credit ratings, risks masked by securitisation, hidden financial leverage, exotic repurchase agreements, extendible securities, structured notes, speculative use of credit derivatives, and hedge funds.

Amgen, Baker Hughes, Dow Chemical and a handful of other corporations with high credit ratings and sagging share prices have become leveraged buyout candidates. Observers say that as the prospect of higher bond yields and more expensive debt appears, certain companies with the best ability to sustain debt payments will look more attractive to buyout shops.

“They’re absolutely better candidates,” said Lance Pan, director of investment research at Capital Advisors Group in Newton, Mass., who compiled the LBO list.