Over the weekend UBS (NYSE: UBS) said that it would be cutting the value of auction-rate securities in it client’s accounts. According to CNN Money "UBS using an internal model to value the securities, will mark them down and inform clients via their online statements. The markdowns will range from a few percentage points to more than 20." Other big banks are likely to follow suit.
UBS held $5.9 billion of the securities in its own accounts at the end of last year. In all likelihood there was also billions of dollars of the paper held by Citigroup (NYSE: C), Merrill Lynch (NYSE: MER), Morgan Stanley (NYSE: MS), Lehman (NYSE: LEH), and other large financial firms.
All of those auction-rate securities may be gone from their balance sheets now, in essence passed to the Fed as collateral for cash from the agency. Primary broker dealers borrowed $37 billion from the Fed last Wednesday. Most other days the amounts is probably in the arena. The Fed has also created a $200 billion facility for banks.
Customers holding auction-rate securities which they cannot sell may be vexed at the financial firms which started the market and then closed it down. The brokers and banks did not want to take on the risk of supporting the auctions with there balance sheets. Those firms have a way out through the Fed’s door, exchange auction-rate paper which is below par for cash.
The institutions, corporations, and individuals holding the paper are stuck.
Douglas A. McIntyre