Auction-Rate Debt Buyback, Now What?

by Paul J. Lamont, Lamont Trading Advisors, Inc. | August 8, 2008

Print

With news of UBS’ $19 Billion dollar buyback of frozen auction-rate debt, we expect former clients of UBS (Merrill Lynch, Citigroup, Wachovia and Bank of America, too) to begin looking for secure places for their cash. Some may even be considering CDs. We would like to point out to investors that CDs (in fact all deposits) allow banks to borrow short and lend long. This same duration mismatch led to the illiquidity of the auction-rate debt market. If depositors run to demand their short-term cash, banks could suffer from the same ‘freeze up.’ Of course, the FDIC insures bank accounts up to $100k. There is even a plan called CDARs where a depositor can insure up to $50M in CDs. But we suspect that UBS’ clients (probably all auction-rate debt holders) have had enough of claim forms and frozen accounts.

Therefore we would like to share with them (and you) what we have been doing for our clients. We would first like to point out that we are an independent investment advisor and only work for our clients. We have no ties to any financial institution.

To lay a strong foundation, we first searched for a more secure financial institution. We found that some investment firms provide greater legal protections and ownership rights for their accounts. Each of our clients is placed in an individual account at a suitable type of financial institution, determined by account size and tax status. When selecting the investment within the account, we have advised buying only individual U.S. Treasury Bills (currently with a 6 month duration). Treasury Bills provide principal protection backed by the full faith and credit of the Federal Government but more importantly force the Treasury to pay you after a stated duration. (The FDIC is under no time restraints.) Because we act merely as an advisor on the account, we do not have the right to halt redemptions like a money market fund. It’s your account; we cannot close the doors if you want your funds. (Your custodian could, however.) The Wall Street firms misled investors when selling auction-rate debt. In contrast, we have provided investors with information as to the procedure if their custodian does fail. If you would like an honest discussion of risk, please contact us. We hope you will consider our LTA U.S. Treasury Bill Account, a smarter alternative to other types of money substitutes.

 

Copyright © 2008 Paul J. Lamont
Editorial Archive

contact information

Paul J. Lamont | Lamont Trading Advisors, Inc.
502 Bank Street Decatur, AL 35601 | Tel/Fax: (256) 850-4161 | Email | Website

The opinions of FSU contributors do not necessarily reflect those of Financial Sense.