The auction-rate market, created in 1985, has fundamentally shut down since February sticking individual investors and corporations with the "near cash" securities. Texas Instruments (NYSE: TXN), Palm (NASDAQ: PALM), and a number of other companies have taken or will take write-offs on the value of the paper which they have been carrying at par. By some estimates the cut on the value of the securities could be 10% to 20%.
Today, Citigroup said the market was dead. The $330 billion auction-rate securities market, which collapsed in February after Wall Street firms stopped using their own capital to prevent failures, will “cease to exist,” a Citi analyst said, according to Bloomberg.
A number of suits are expected to be filed against the banks and brokerage firms which ran the auctions. They withdrew from the market suddenly rather than take excess paper from the auctions onto their balance sheets. They were making money in the process of facilitating the trading.
Other banks will be sued from representing the paper as "cash", when, indeed, without regular auctions, it was not liquid at all, which undermined the value of the asset.
Douglas A. McIntyre