Filed under: Bad news, Industry, Law, Marketing and advertising, Palm Inc (PALM)
Yesterday, Palm (NASDAQ: PALM) had to add $25 million to its losses for last quarter due to a write down in the value of auction-rate securities. Public companies are apt to have to do more of that as they report their first-quarter numbers. A number of individuals will also get brokerage statements that will show that each dollar they’ve in the instruments is now worth as tiny as 80 cents.
The bonds produced by the auction-rate market have been considered the equivalent of cash since the market began in 1985. The auctions were run frequently by huge banks, so getting money in and out of the paper was simple. But, late last year and early this year, the banks that made the market in the instruments effectively shut the system down. Part of their role was to take excess securities in each auction and hold them until the next set of trading They could sell them then. But, in a tight credit market, banks did not want to hold the paper on their balance sheets.
Now the SEC and Financial Industry Regulatory Authority want to know if brokerage firms and banks marketed the auction-rate securities as cash equivalents while knowing that they were not. According to The Wall Street Journal: “Brokers had pitched auction-rate securities as liquid, super-safe investments with interest rates slightly better to those of conventional money-market funds. Now investors are asking why they weren’t warned about the possibility of failed auctions.”
The entire value of auction-rate investments now in the market is nearly $360 billion. Most of those securities are not trading now, so companies and individuals cannot get their money out. That might make for one, very huge class action suit or a series of smaller ones by investors who want their “cash.”
Douglas A. McIntyre is an editor at 247wallst.com.
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