Some large companies, like Bristol-Myers (BMY), has already said that auction-rate securities on their balance sheets may have to be written down now that the market for this paper is illiquid.
The Wall Street Journal points out that a number of start-ups have similar problems. Money provided by VCs was sometimes put into auction-rate instruments because of the reasonable yield and highly liquid market. Some of these start-ups now have cash problems, but their VCs could loan them funds while the markets free up
The real danger to the stock market and economy is the thousand of mid-cap and small-cap companies which may have put their cash into these instruments. They are often carried on the balance sheet as cash-equivalents. Now, because they cannot be sold, audit committees may have them written down in value. This could take public companies with tens or hundreds of millions in quarterly revenue and modest profits and push them deeply into the red.
Smaller public companies with significant capital expenditures may no longer have access to the cash to complete these projects. Their funds in auction-rate securities could completely compromise their access to funds.
The Nasdaq indexes face another set of downward pressures as companies listed on that exchange begin to file that their cash positions are no longer cash and that large P&L losses will be the result.
Douglas A. McIntyre