Message Font: Serif | Sans-Serif
 
No. of Recommendations: 10
Hewitt,

Is that information you believe you can generally obtain? the quality of the cash?

What size write-down do you believe they'll have to take?

I'm not convinced that an ARS "failing" at auction means that the value has decreased. Many people issue ARS that are financially viable and are not financial companies. For example, the Port Authority of New York. I mean who wouldn't want to own debt of a toll collector for NYC's subways/airports, etc? The fact that they failed at auction just means that there are not enough buyers there. And the issue is the ARS were backed by Ambak or MBIA, and no one wants to touch something like that anymore.

Now, technically, yes, if there are not enough buyers, then the value of what you owned goes down. But what it means in practice is the interest rate on these gets reset to something ridiculous, like 20+%. (I'm sure this isn't the case for all ARS, but from what I've heard, it is for many.) So while AEO holds these, they're making 20% interest on something they can't sell.

Of course the Port Authority of New York doesn't really want to pay 20% interest, so they'll eventually issue fixed rate bonds if this continues and call the auction rate securities, and AEO will be made whole.

As long as AEO doesn't need to sell these ARS, they'll be fine. It's not like a CDO where the underlying property is worth less than the debt...

Do you understand it differently? Should I be more worried about ARS than I am?

Cameron
Print the post  

Announcements

What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.