Auction-rate insecurity: Local investors and businesses still waiting to get money

davenportteaserSome local businesses and individuals are still trying to get their money out of auction-rate securities – bond funds that were thought to be as accessible as savings accounts but became frozen.

BizSense reported in April that investors with Wachovia Securities, Davenport & Co. and Charles Schwab could not get money from mutual funds that invest in auction-rate securities.

Auction-rate securities used to be as reliable as CDs but with slightly higher yields. That is until the big banks stopped buying them, and the entire process by which they were bought and sold broke down. Customers were stuck holding the bonds, which continued to pay interest but were not redeemable.

One local business that asked not to be identified fired a Wachovia broker who put the company’s money into the funds. About half of the money that was tied up has since been returned by the mutual fund company, but the other half is still tied up (separate fund companies). The local firm said the money was supposed to be used for payroll. To make up the difference, the principals sold more contracts to boost income.

Not all local wealth management firms had clients with money invested in the auction-rate securities. But at least three did. Richmond-based Davenport & Co. said customers who have money tied up in auction-rate securities are starting to get back some of their money. Clients who needed access to money that was tied up were able to borrow on margin if they so chose.

“We don’t have anybody in distress of situation,” said Kathleen Maccio Holman, Davenport & Company’s senior vice president and chief administrative officer.

“We continue to monitor the situation closely and remain confident that Nuveen will continue to redeem positions in orderly fashion,” Holman said.

More reading: Auction-Rate Probe Grows Over Clarity From Brokers (Wall Street Journal)

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