Federal Reserve, the stock market, and the Wall Street banks face a new wave of worries on auction rate securities
Deolinda Francisco
Jun. 29, 2008

The auction rate securities provided a safe heaven for many companies who parked their money in high quality auction rate securities. These large investors invested their money with the perception that either the dealer banks or the Federal Reserve will support their investments in case there is a sever liquidity crunch. Now they find there is no surety of that.

There will a large exodus from these auction rate securities into the Treasury bills this week. Investors are perplexed at what they have been told and what the reality is. The auction rate securities yield slightly higher than the Treasuries but if there is no one standing behind it, it is closer to junk in case severe liquidity crunch.

This makes it very difficult for businesses to raise capital. The rates on these auction rate securities will skyrocket creating a further pressure on the stock market. Federal Reserve should have controlled the way these securities were marketed. Where the Fed has failed again and again is in its regulatory responsibilities.

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Deolinda Francisco
The auction rate securities provided a safe heaven for many companies who parked their money in high quality auction rate securities.
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