Another $500 billion market you've never heard of freezes up


Fourteen months ago, I learned about the $330 billion market for a new financial instrument called Auction Rate Securities (ARS) -- bonds sold as cash-like instruments whose yields reset in periodic auctions. But in February 2008, the banks that created ARS stopped propping up the market and people who held these cash-like securities discovered that their ARS had been frozen. Since I first posted about this, 7,988 comments have appeared on the post from people trying to get their money back.

Today, I learned that there is another instrument with an even bigger market that has been suffering the same fate -- Variable Rate Demand Notes (VRDNs) -- which until October 2008 consisted of supposedly low-cost bonds that cities issued and whose rates reset in daily or weekly auctions. Houston issued $1.8 billion worth of VRDNs in May 2008, but when the auctions froze up, it found itself paying 15 percent interest rates instead of the much lower money-market-type rates it had anticipated.