Friday, March 28, 2008

Enjoy the Haircut

The Muni Auction Rate market continues to decline. Firms have been scrambling for a solution, but so far none has appeared. The next step is to ask for a Federal government bailout to put liquidity back into the muni auction rate market. If Bear Stearns can effectively be bailed-out for $30B then how about a few billion for the auction rate market?

If this trend continues soon the Fed will be providing liquidity in every sector to hold off financial calamity. This brings up an image of a carter greasing the wheels of the wagon to keep it moving, while in actuality the entire wagon is collapsing without him noticing.

Earlier HingeFire articles discussed the Auction Rate fiasco (see More Credit Turmoil: The Muni Auction Rate market freezes and Auction Rate Stress Continues: Muni Bond Funds Impacted). Today UBS placed a stake in the heart of customers holding auction rate securities when the firm marked these securities to market giving many holdings a 20% haircut. Customers had been told previously that these securities could not be sold at the regularly scheduled auctions but they retained full value.

So much for integrity in the markets, customers were sold these investments by brokers who promised they were a safe alternative to cash offering a slightly higher yield. This markdown of auction rate securities is expected to spread to other Wall Street firms this coming week, leaving a trail of furious wealthy investors in its wake.