Background
The first auction rate security for the tax-exempt market was introduced by Goldman Sachs in 1988. However, the security was invented by Ronald Gallatin at Lehman Brothers in 1984.
Auctions are typically held every 7, 28, or 35 days; interest on these securities is paid at the end of each auction period. Certain types of daily auctioned ARSs have coupons paid on the first of every month. There are also other, more unusual, reset periods, including 14 day, 49 days, 91 days, semi-annual and annual. Non-daily ARS settle on the next business day, daily ARS settle the same day.
As bank loans became more expensive, the auction market became increasingly attractive to issuers seeking the low cost and flexibility of variable rate debt. Buyers received a slightly higher interest and an apparent assurance of liquidity through the auction process.
By early 2008 the ARS market had grown to over $200 billion, with roughly half of the securities owned by corporate investors. Because of their complexity and the minimum denomination of $25,000, most holders of auction rate securities are institutional investors and high net worth individuals.
In February 2008, the auction market failed, and most auction rate securities have been frozen since then, with holders unable to dispose of their securities. Investment banks that participated in the distribution and marketing have agreed to repurchase around $50 billion in securities from investors, including municipalities, under duress of investigations by U.S. state attorneys general.
Student loan auction rate securities (SLARS) make up a large percentage of the ARS market.
Read more about this topic: Auction Rate Security
Famous quotes containing the word background:
“I had many problems in my conduct of the office being contrasted with President Kennedy’s conduct in the office, with my manner of dealing with things and his manner, with my accent and his accent, with my background and his background. He was a great public hero, and anything I did that someone didn’t approve of, they would always feel that President Kennedy wouldn’t have done that.”
—Lyndon Baines Johnson (1908–1973)
“Silence is the universal refuge, the sequel to all dull discourses and all foolish acts, a balm to our every chagrin, as welcome after satiety as after disappointment; that background which the painter may not daub, be he master or bungler, and which, however awkward a figure we may have made in the foreground, remains ever our inviolable asylum, where no indignity can assail, no personality can disturb us.”
—Henry David Thoreau (1817–1862)
“In the true sense one’s native land, with its background of tradition, early impressions, reminiscences and other things dear to one, is not enough to make sensitive human beings feel at home.”
—Emma Goldman (1869–1940)