WASHINGTON – As corporate losses mount from investments that until recently seemed as safe as cash, shareholders are in a pickle: They don’t know the severity of the problem or which companies are affected.
So far, Bristol-Myers Squibb Co., US Airways Group Inc., Qwest Communications and others have disclosed multimillion-dollar losses on a common type of higher-yielding bonds marketed as short-term and low-risk.
Such descriptions for these investments, known as auction-rate securities, were at best wishful thinking in the era of easy credit that helped fuel the housing boom. But as credit tightens on Wall Street and around the globe, it has become extremely difficult for companies and wealthy individuals to sell these securities, which are backed by mortgages, student loans and municipal bonds.
“The problem is quite widespread,” said Lance Pan, director of investment research at Capital Advisors Group Inc. in Newton, Mass. “There will be more confessions to be made by large corporate investors.”
For years the securities were attractive to investors because they offered a slightly better return than ultra-safe investments such as Treasury bills at a time when interest rates were relatively low. Over the past week, however, there have been barely any buyers in the more than $300 billion market as investors have shied away from all but the safest places to put their money.
Since some of these investments are backed by troubled bond insurers, investors have been particularly queasy. Hundreds of auctions have failed over the past week, driving up the interest rates for securities that do get auctioned off. That makes it more expensive for municipalities to raise money through bond sales.
Investors’ growing aversion to auction-rate securities doesn’t mean the assets underlying them are worthless; but the companies that own the securities are increasingly under pressure to acknowledge in future financial statements that their value has dropped. Auction-rate securities can be held by mutual funds, but not money-market funds.
Wall Street’s inability to attract investors for these securities is also a big problem for government agencies selling the debt, including student loan programs in Michigan and Montana, and the operator of airports, tunnels and ferries in New York and New Jersey.
Alarms were sounded about risks in the auction-rate market long before the latest flare-up. The Securities and Exchange Commission in May 2006 fined 15 Wall Street firms $13 million to settle charges that they had manipulated the market.
Still, many executives likely were unaware of what they were buying, said Robert Salomon, a professor at New York University’s Stern School of Business. “I would expect to see corporate treasurers raise the question of: well, what the heck is in our portfolio?” Salomon said.
Companies typically only break out the details of these investments if they go bad.