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.

The brokers continued to do this until a year ago. That's when those individual investors found out that their savings had effectively gone up in smoke. Some of these people have gotten their money back after months of struggle. I can only imagine how much stress they suffered. Others are still waiting for a resolution and their pain in the ARS (pun intended) has long been replaced in the minds of those who run the mainstream media by the suffering of others -- such as those who lost their money in the alleged $50 billion Madoff Securities ponzi scheme, and now with the news alleged schemer, R. Allen Stanford.

If you are still fighting to get your money back, you have not been forgotten. For those who have not been sucked into this ARS mess, the lesson is to keep control over your money and not let brokers get their hands on it.

Peter Cohan is president ofPeter S. Cohan & Associates. He also teaches management at Babson College. His eighth book isYou Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing.

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