Valuation of Auction Rate Securities
Accounting Statement FAS 157 defines fair value, which under the new guideline, is typically referred to as “mark to market” accounting. With Auction Rate Securities no longer being liquid, public companies began to write down their ARS holdings starting in the first quarter of 2008. Through May 31, 2008, 402 publicly traded companies had reported Auction Rate Securities on their books. Of those 402, 185 had taken some level of impairment. However, there had been no ascertainable trend in the amount of writedowns taken. Firms have reported discounts ranging from 0-73% of par value. IncrediMail, Ltd. proved the most extreme example of this as it booked an impairment of 98% off face value for its ARS holdings, while Berkshire Hathaway took no impairment on its more than $3.5 billion of these securities. Some of the higher-profile firms taking writedowns include Bristol-Myers Squibb, 3M and US Airways. Citigroup took a $1.5 billion loss on its inventory of auction rate securities.
Duke University Law School professor James Cox summed this discrepancy up: "I think some people act opportunistically, some people act optimistically and some people act fairly."
The valuation of auction rate securities has proved especially difficult as Bank of America and other brokerage houses refuse to assign a value to their clients’ holdings. UBS AG has presented clients with several different values for ARS. Also, Interactive Data Real Time Services, a provider of independent pricing services for the investment industry, discontinued the pricing of approximately 1,100 student-loan auction rate securities on May 5, 2008.
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