At least three Richmond investment firms are having trouble retrieving client money from investments that were thought to be short-term and low-risk.
Individuals and businesses that invest with Davenport & Company, Charles Schwab and Wachovia Securities might be unable to access money from certain mutual funds that invest in municipal bonds, also known as auction-rate securities.
Some local investors have been notified. Others have had to contact their advisors to ask about their exposure. The money may be tied up for three to six more months, according to those familiar with the issue
“We need the money in soft months,” said one business owner who invests with Wachovia Securities and learned last week that he cannot access money that he thought was never more than a week away. He asked that his name not be used for fear of tarnishing his relationship with Wachovia.
“Our understanding was this was liquid and we could access it immediately,” the business owner said. “Six months is not immediately.”
Nationwide, around $300 billion is tied up in the auction-rate securities. The local amount is unknown.
Wachovia Securities Spokesman Tony Matera (now based in St. Louis) said that Wachovia is working on a solution. “To be clear, this is not specific to Wachovia Securities,” Matera said. “It’s a national issue and we have lots of people working very diligently to find a way to restore liquidity to the market, but it’s not going to be quick.”
A statement by Davenport & Company’s Senior Vice President and Chief Administrative Officer, Kathleen Maccio Holman, confirmed that the company has clients who hold auction-rate securities. “Davenport has taken steps to provide its affected customers with alternative forms of liquidity until these securities are sold via auction or redeemed by the issuers,” Maccio Holman said in a written statement, adding that Davenport & Company does not normally give phone interviews to the press.
Investors say they thought the funds were as safe and accessible as money-market funds or savings accounts. Plaintiffs in New York have sued Deutshe Bank, TD Ameritrade and Wachovia saying they were misled.
Auction-rate securities are lesser known investment instruments that historically provided a higher yield than more traditional CDs and money markets. They were bought and sold every 7 to 35 days at auction, granting investors quick access to their cash, sometimes even within 24 hours if a brokerage firm lends out the money. But major buyers like Goldman Sachs stopped buying them when the credit crunch hit in February, and so the auctions seized up. Now there are no buyers and too many sellers.
If an investor really wants to sell, he may have to take a steep loss.
“It’s similar to owning a house on the market that you can’t sell,” said Chris Williams, director of investment products at Virginia Asset Management. “It may have value to it, [but] you just simply don’t know when someone is going to come buy it from you.”
“Two years ago anybody could get rid of a house; auction-rate securities were like that last year and for years before that,” Williams added.
Most local investors did not buy the bonds directly, which are issued by the likes of cities, hospitals, schools and museums. Instead investors usually purchase shares of mutual funds that buy and sell the bonds and that pay a dividend. Local advisors say that, like any investment, there was always a risk associated with auction-rate securities and the mutual funds that purchase them, but many investors ignored the small print or assumed the future would be like the past, when the securities were essentially as liquid as cash.
“As the former chief investor officer at Wachovia, and during my ten years there, we always said, ‘Hey, guys, there is a liquidity risk,’” said Michael Jones, co-founder and chief investment officer at Riverfront Investment Group, a new firm that advises other financial advisors. “This is not a money market. There is a chance you don’t get your money back.”
Many of the mutual funds that buy and sell the auction-rate securities (ex. Nuveen) are working to raise money to buy back shares and to get investors their money. But there’s no telling how long that might take, and such measures do nothing to protect against similar problems in the future.
“Some people got into these and it wasn’t suitable for them at all,” Jones said. “They should have been in cash, a CD or something more liquid. They probably got a better rate because of it, but now people are getting hit with the downside of that risk.”
Shares in closed-end funds trade on exchanges like stocks.
If You Can’t Sell, Good Luck, March 30, New York Times
Wake up Wall Street, Joe Investor is hurting too, March 31, Fortune
Auction Rate Securities: What Happens When Auctions Fail March 31, FINRA