Wednesday, December 19, 2007

The Problem with Auction Rate Securities.

The reclassification by Palm Inc. (PALM) of $75 million in short term investments to non current raises the issue of auction rate securities again. So what is the problem with them?

They are actually long term securities, not short term, with the rate reset on a short term schedule using a Dutch Auction methodology. If the auction fails, then the holder can't get access to its funds until the next auction.

Also, the issuer does not conduct the auction, it is done by Broker dealers.

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