Rigged Bids, SEC Give Dealers Edge as Auction-Rate Bonds Fail

More than a year after 15 securities firms settled claims of manipulating auction-rate bonds, the $360 billion market remains as opaque as ever.

Investors can't get basic information about trading in their securities, like the interest rate. Qwest Communications International Inc. and Synaptics Inc. haven't been able to unload the debt when they wanted to, regulatory filings show. Borrowing costs on the $270 billion of auction bonds sold by state and local governments have climbed an average 13 basis points compared with notes that aren't subject to periodic sales, according to the brokerage industry's trade group.

The collapse of debt backed by subprime mortgages that forced banks to report more than $50 billion of losses and writedowns this year is infecting the market for auction securities. Investors are concerned because brokers can advise bidders on what they should pay and the U.S. Securities and Exchange Commission allows dealers to use their inside information to compete with bondholders.

``When you buy auction securities, you are beholden to a broker,'' said Adam Dean, president at SVB Asset Management, a Santa Clara, California, firm that manages about $6 billion of corporate cash accounts. While Dean doesn't buy the debt because of the risk that they can't be readily converted to cash, ``our clients are constantly being solicited by brokers,'' he said.

Unlike Treasuries or stocks, there is no daily source of information about auction-rate bonds, floating-rate securities whose interest rate is reset though periodic bids, typically every seven, 25 or 28 days.
financial-stock.com