Theories on Liquidity


Trust, value, respect for one another, confidence, a person’s word plus a laundry list of other descriptives comprise not only our social fabric but our national financial landscape. If it were otherwise, we’d all need to walk around with pistols strapped to our leg.

That is my segué into a nasty trick Wall St pulled on a few million investors. You may be one and not even know it. The investment at the root of the trick goes by the acronym ARPS.

ARPS stands for auction rate preferred shares. I like the sound of auction preferred shares. Don’t you? It has a flair and bon vivonce about it almost unequaled in Wall St fictions.

You should also know these things called ARPS go by the names of other cash and cash alternatives. You should also know these were mainly, and still are, found in money market mutual funds.

History of Cash and Cash Alternatives

Other cash and cash alternatives have been around for a good number of years. At least 20 years by my research. They were simple little instruments that were safe and paid like clock work.

There was little or no risk to an investor’s principal because like the letter A – auction – said, the major players in the game conducted an auction in which they set the interest rates. All above board because it was done with the blessing of the SEC and, mind you, done in the public arena.

I use the verb were in the above paragraph in its strictest sense because this past February Goldman Sachs, Citigroup, Merrill Lynch and every other brokerage house quit bidding. This nasty trick immediately evaporated liquidity. I mention these three houses because they were the ones who created the auctions.

The lack of liquidity means people with money in this fund cannot take their money out. The fund is still carried on the holder’s statement at par (face) value because the underlying Triple A rated bonds are still in the fund’s portfolio and these bonds are still paying interest but the money simply isn’t available to the fund’s owner. In other words, the owner is not getting a dime from their account.

I bet if you are like me, you are incredulous and either can’t, or refuse, to believe what you just read. If you have money in one of these funds, you are nodding up and down and screaming out loud to anyone who can hear not to invest a cent in these boat anchors.

Of course Wall St still charges its fees and expenses just as if nothing has happened. There is a lot of speculation as to why the brokerage houses quit bidding but that doesn’t help the fund’s owners one bit.
The government has stepped to the plate to relieve the fiasco in the CDO and SIV markets but hasn’t done a darned thing to help ARPS owners. There is a lot of speculation as to the why of that non governmental action but that doesn’t help the fund’s owners one bit either.

I think there is something rotten at the U.S. Treasury. Just an opinion but if one looks at the man at its helm one sees deep Wall St roots probably still being watered by the good ole boys sitting in the leather chairs in the board room.

Joe Citizen is denied access to his funds but the creators, promoters and hucksters behind CDOs get a nice bailout. By the way, did anyone notice not only the Merrill-BoA “merger” but the $85 billion dollar bailout this last week… not to mention the MASSIVE $700 million bailout?

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  1. “Trust, value, respect for one another, confidence, a person’s word plus a laundry list of other descriptives comprise not only our social fabric but our national financial landscape.”

    You’re a realtor. Realtors’ helped contribute to this whole subprime mess at the initial stage. Do you not realize that you’re a hypocrite when you post rhetoric promoting the interests of “Joe Citizen”?

  2. Mike,

    I don’t know where you got the idea I am a realtor. I will admit I WAS a real estate broker back in the 90’s.

    I guess I could call you names too and that would get one hell of an argument going but instead I think I will gently point out the real estate people didn’t create or contribute to this whole subprime mess. By your post, I surmise you missed the root cause.

    That really isn’t surprising since tunnel vision is one hell of a limiting factor when it comes to seeing what is happening in front of your face and/or providing a solution to this or any crisis. Unless I missed your plan for a solution, I will also surmise you don’t have one and can’t even come up with a germ of an idea anyone could use to construct one.

    I will make a third assumption – you can’t even identify one Joe Citizen who understood what the outcome of Greenspan’s loose money policy was going to turn into. I’d bet you didn’t know how it was going to turn out either. Closed eyes and fogged brain do that to a guy.

    You probably thought the price of tulips would continue to rise and you’d keep buying and selling and buying and selling. Now that the bubble burst, you feel confident pointing a finger.

    Great, but point it at the correct culprits.

    Other than that, how’d you like the play Mrs. Lincoln?

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