The auction rate blues…

April 18, 2008

Judging by the news this morning about new subpoenas going out over auction rate securities, this is one more headache for Wall Street that’s likely to get worse. So I decided to take a look at how companies are talking about this mess in their recent filings. The short answer is a lot more than they have before: there were 870 10Ks, 10Qs, or 8Ks that mentioned the term during the first quarter of 2008. Just five years ago that number was a paltry 72. The problems have caused a whole host of companies — from Continental Airlines (CAL) to Standard Microsystems (SMSC) to reclassify these short-term investments as long-term investments because the market has essentially collapsed.

One of the more interesting disclosures I came across yesterday was in the supplemental financial material that SLM (SLM) filed yesterday as part of its 8K:

The Company has not recently and does not intend to rely on the auction rate securities market as a source of funding. At March 31, 2008, we had $3.3 billion of taxable and $1.7 billion of tax-exempt auction rate securities outstanding on a Managed Basis. In February 2008, an imbalance of supply and demand in the auction rate securities market as a whole led to failures of the auctions pursuant to which certain of our auction rate securities— interest rates are set. As a result, all of our auction rate securities as of March 31, 2008 bear interest at the maximum rate allowable under their terms.

We also liked the disclosure in Tivo’s (TIVO) recent 10-K where they talked about “high-grade auction rate securities”, which we’re guessing is different than the regular auction rate securities the company had disclosed in previous filings, and different too from the crud that all these other companies have on their books. If anyone wants to clarify what makes some auction rate securities high-grade, I’m all ears.

With this much activity, it sounds like it’s high time for our friend Merle Hazard to head back to the studio and come up with another song.

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