24/7 Wall St.

It is only a matter of time before some big American companies sue the banks and brokerages that ran the auction-rate markets. Their case will be that, in a market which has operated since 1985. the financial firms presented the paper as cash-equivalents. Getting in and out of the instruments was easy, and took, at the most, a few days.

The banks walked on the market when its was clear that their balance sheets had been torn to pieces. In the auction-rate world they would take any imbalances in an auction onto their books and clear out the securities at the next round of bidding. They acted, in essence, like specialists at the NYSE do. They kept the market orderly.

Now, some large companies, especially in the tech sector, are facing write-offs because they took the paper on their balance sheets and treated it as cash. Auditors are looked at those securities and saying that, because they illiquid, they should be written down. That, in turn, hits their P&Ls.

According to The Wall Street Journal, Monster (MNST) has $357 million of auction-rate securities on its books. Troubled tech firm Palm (PALM) has almost $75 million. For some of these companies, the figure may be a large part of their cash positions. Funding deficits or capex may become a major challenge.

The tech companies are only the beginning. It is safe to say that scores of public companies have auction-rate paper. It was an easy way to get higher yields than with government paper and allowed for almost instant access to capital.

As is almost always true in corporate America, someone is at fault, or, at least must be blamed in public. The banks and brokerages who ran the auction-rate market are clearly the target. And, perhaps they should be, especially if they represented that the market they created and ran was something that it was not.

Douglas A. McIntyre