How to Move Past ARS Investment Illiquidity

The financial system has made many investors quite a bit nervous. In February, all of the large banking companies decided to pull support from the auction-rate securities market. Some experts attribute this decision to the credit crunch. Once this happened, the auctions completely failed, and rates were selling at unacceptable prices. Many investors went to withdraw their money, only to find out that it was no longer liquid.

Lawsuits popped up around the country from investors who felt cheated. Some of these banks advertised auction-rate securities as cash-equivalent accounts that gave a higher return than the more traditional money market accounts. The truth of the matter was that these investments were long term, requiring sometimes 30-year maturation cycles.

Banks involved in this fraud scandal were among some of the most highly respected investment firms. For example, the New York Attorney General has filed a lawsuit against Citigroup for fraud. Originally, the general’s office wanted the organization to repay the money taken from all of the auction-rate securities sales as well as pay a 400 million dollar fine to the various regulatory agencies investigating the firm.

For people who have money stuck in an ARS investment, there are a few things you can do to meet your cash flow needs. The Financial Industry Regulatory Authority (FINRA) is an agency dedicated to helping investors and making sure that the industry does not go out of hand. FINRA has a few recommendations for individuals who have become a victim of big bank fraud.

FINRA first suggests that on should look at his offering documents and read them very closely. Everyone once and a while provision are made in the event that the ARS market fails. Some issuers reserve the right to convert ARS account into fixed or variable interest accounts.

Investors do have the option of selling their account in the secondary market. The risk involved is that fair market value is harder to determine, which means that you could sell your account for much less than what it is worth. Investors must also be aware of any fees that are associated with a secondary-market sale.

Borrowing on margin is another option. Some of the banks offer to loan money against the value of an ARS account. However, interest rate charges on these loans can be quite alarming. Other options include liquidating other assets, or simply holding on until the next auction, if you do not immediately need the money.

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