Auction rate securities: The silent fraud six times larger than Madoff


It was a year ago today the world first became aware of Auction Rate Securities (ARS). That was when people who thought their money was in something safe, like a money market fund used to be, found out their funds were frozen. And although some have gotten back their money, there are still people whose funds are still frozen in ARS limbo. But it isn't for lack of trying -- they've contacted regulators, journalists, and Congress in their efforts. Some have succeeded and some have not.

The $330 billion ARS market was originally created for companies to park their short-term cash safely while financing various municipal projects. The rates on ARS would reset in weekly or monthly auctions. But then a change in an accounting rule made it unattractive for companies to invest in ARS. So in order to keep the ARS market from collapsing, brokers started to support the auctions themselves and pushed hard to dump those ARS on their unsuspecting "wealth management" customers -- e.g., individual investors.