When Citibank announced it was going to cash its customers out of illiquid auction rate securities, many people didn't realize that a large bulk of those illiquid securities were what's known as SLARS - Student Loan Auction Rate Securities. Like the preferred auctinon rate securities issues by Pimco and other investment banks, SLARS have low reset rates, and as a result haven't been called.
Accrued Interest writes:
"There is a key element of this that hasn't been well reported. A very large percentage, something like 80%, of the true "municipal" auction-rate securities have either been refinanced or are actually succeeding at auction."
It's now going to be up to the investment banks to figure out how to makes these securities liquid in some way. Most likely they'll try to repackage them and issue bonds to raise the money to cash out the original auction rate holders. The success of this will depend on the quality of the underlying assets and the market environment. I'm not exactly sure how the cash raised by issuing auction rates was issued by student loan organizations but if defaults start to occur in the student loan market then one could expect these securities will lose value and will become harder to repackage.
One hopes that Citibank, Wachovia, UBS, etc. find a way to repackage these instruments so that holders can be cashed out.
Related Articles:
How to Purchase Auction Rate Securities by JRodgers - Oct 03, 2007
Failure in Auction Rate Security Market and What It Means by BestCash Admin - Feb 14, 2008
Did Auditors Triggers Sell Off in Auction Rate Securities by Sam Cass - Feb 22, 2008.
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