Auction rate securities
Auction rate securities are a financial instrument that is typically used by companies or municipalities in the USA . These are long-term (usually 20 to 30 years) bonds with variable (upwardly limited) interest rates . The level of this interest rate is set in regular auctions . The period between the auctions is regulated differently for each bond and can be any length, but 7 or 28 days are typical. These bonds were first marketed in 1988 by the major US bank Goldman Sachs .
market
In the USA there was a market for auction rate securities with a volume of approximately 330 billion US dollars in early 2008 . Issuers of these bonds ( borrowers ) with variable interest rates were usually larger companies or municipalities. Bidders for these bonds ( lenders ) were usually institutional investors , but also many private individuals. The loan amounts are usually traded in partial amounts of 25,000 US dollars each.
Auction process
For example, if a $ 1 billion bond is offered for auction for a period of 28 days, market participants will place bids at certain interest rates for partial amounts of this billion. These could be the following:
- $ 200 million at 4.80%
- $ 100 million at 4.83%
- $ 300 million at 4.91%
- $ 200 million at 5.07%
- $ 500 million at 5.20%
- $ 800 million at 5.33%
- $ 900 million at 5.40%
In this example, the bids from the lowest to the highest bid would be processed until the loan amount over $ 1 billion is raised. The bidders from 4.80% to 5.07% would receive a 100% allocation , the bidders with 5.20% would receive a 40% allocation. All bidders with bids greater than 5.20% did not receive any bonds.
Interest payment
In this case, the company or municipality that issued the bond must pay the interest rate of 5.20% to all bidders. Bidders who would have been satisfied with a lower interest rate (e.g. 4.80%) have thus achieved an additional consumer surplus. The interest rate determined in the auction is now valid until the next regular auction. The interest payment date is regulated in the bond conditions, but there is at least one interest settlement per auction period.
Failed auction
If insufficient bids are received for a bond at an auction, then one speaks of a failed auction. Failed auctions can occur, for example, if bidders are concerned about the publisher's creditworthiness and therefore do not bid. Furthermore, the bidders could also invest their money in other financial instruments that promise higher profits (because the maximum interest rate of the bond is, for example, below the market interest rates).
In such an auction, the interest rate is then set to the maximum permissible value. This is regulated in the terms and conditions of the bond.
Since the bonds usually run for many years / decades, some "old bidders" remain on their bonds in such a case. The bonds are not worthless, but as long as there are no new bidders, the "old bidders" remain owners of the bond and only receive the interest payments at the maximum possible rate. It was only after the expiry of the bond they get their capital back given ( solvency of the debtor provided).
2008 market turbulence
From 1988 to the beginning of 2008 there were almost never failed auctions, because the brokers of this form of financing (brokers were almost exclusively the major US banks) almost always bid on the bonds themselves at an interest rate just below the maximum interest rate. This made the market for institutional investors and private individuals very liquid , as they were able to sell their bonds with almost 100 percent certainty at every auction date.
But when these big banks themselves got into trouble in early 2008 due to the financial crisis from 2007 , they were no longer able to bid at the auctions. At the same time, a general fear of unsecured loans spread across the market, so that suddenly there were hardly any bidders available for this type of bond.
As a result, the interest rates for the borrowers suddenly jumped to the maximum possible amount and the "old bidders" were no longer able to make their given capital liquid in the short term.
Comparison with supervisory authorities
As a result of this development, the US Securities and Exchange Commission ( SEC) and supervisory authorities of several US states initiated investigations against a number of banks involved, as the banks had sold the investment in auction rate securities to the bidders as an investment that could be liquidated at any time.
In August 2008, the big banks gave in and, in a settlement with the SEC and the regulatory authorities, undertook to repossess billions in bonds from investors willing to sell and also to pay the SEC a fine for misrepresentation in the sale of financial products.
The repurchased bonds thus become the property of the banks. There, as long as the debtor does not have to file for bankruptcy or the bank can resell the bonds in an auction, the bonds earn interest as normal at the maximum possible interest rate.
The following banks have currently accepted the following buybacks and fines:
- UBS is buying back approximately $ 19.4 billion in bonds and accepting a fine of $ 150 million.
- Merrill Lynch is buying back approximately $ 12.0 billion worth of bonds and accepting a fine of $ 125 million.
- Wachovia is buying back approximately $ 8.5 billion worth of bonds and accepting a fine of $ 50 million.
- Citigroup is buying back approximately $ 7.4 billion in bonds and accepting a fine of $ 100 million.
- Morgan Stanley is buying back approximately $ 4.5 billion worth of bonds and accepting a fine of $ 35 million.
- JP Morgan is buying back approximately $ 3.0 billion worth of bonds and accepts a fine of $ 25 million.
- Deutsche Bank is buying back bonds valued at approximately $ 1.0 billion and accepting a fine of $ 15 million.
swell
- ↑ a b c SpiegelOnline - Banking Crisis: UBS takes back bonds for $ 20 billion (August 4, 2008)
- ↑ a b c Financial Times Deutschland - Other banks are buying papers from damaged investors ( Memento from February 11, 2013 in the web archive archive.today ) (August 15, 2008)
- ↑ Reuters - Deutsche Bank also buys back ARS bonds under pressure (August 4, 2008)
- ↑ Interim report of Deutsche Bank, 2nd quarter 2009, page 65 (PDF file 803 kB) ( Memento of the original dated May 30, 2010 in the Internet Archive ) Info: The archive link was inserted automatically and has not yet been checked. Please check the original and archive link according to the instructions and then remove this notice. October 5, 2009
