New York Times on Auction-Rate Securities … Again

The New York Times recently complained about a recent lawsuit involving auction-rate securities failing in a blog, “When Law Obscures the Facts” (http://dealbook.blogs.nytimes.com/2009/10/09/when-law-obscures-the-facts/#comment-323241). The article says, “The collapse of the auction-rate securities market is a largely forgotten part of the financial crisis, a disaster that was soon overwhelmed by bigger ones — except for the investors who were caught up in it, The New York Times’s Floyd Norris writes in his latest High & Low Finance column.” (To read the original, see: http://www.nytimes.com/2009/10/09/business/09norris.html?dbk.)

It continues, “The investors thought they were buying safe short-term securities — sort of like a money market fund but with an expectation of a slightly higher return. The securities were supposed to be easy to sell for face value. Now, Mr. Norris says, many of the investors are stuck with securities that pay ridiculously low yields. In some cases, the securities will never mature, so the investors will never get their money back unless they sell them for a fraction of what they paid. Those who thought they were being safe and cautious in fact were taking huge risks.”

As we wrote in a comment, calling the auction-rate securities market “forgotten” is a laugher. The New York Times has written about this tiny sector of the investment marketplace more times than I can count. Investors, all clearly qualified, sophisticated institutions, enjoyed outsized returns for years. Meanwhile, The Times never uttered a peep. Why didn’t they question why the sector was able to pay higher rates than money market mutual funds? Investors accpeted the returns, so were clearly were aware of the risks. Any additional attempts to extort more money from financial institutions only rewards a handful of lawyers and punishes the vast majority of investors who had enough sense to avoid higher-yielding “free lunches” like auction-rate securities in the first place.