Auction Rate Securities

Via the FT, more settlements in the Auction Rate Securities blow up:

Regulators have accused banks of misrepresenting ARS as liquid, cash-like instruments. The collapse of the $330bn market in February highlighted the risk in the long-term securities, whose interest rates are periodically reset at auctions.

The gist: Investors are stuck with a product which was sold to them as a money-market with a better yield, but for which there is now no market which they can use to exit.

One story: Via Bloomberg:

"When I bought these I wanted a safe security and I was told they were redeemable at par," said Stokes. "Then when the market failed and I wanted a secondary market to trade out, I was told that Wachovia doesn't make a secondary market."

The upshot: Here is the SEC description of the settlement with Citi. Note that one of the terms prevents the bank from liquidating its own positions before its clients'.