Auction Rate Horror Hits Joe Sixpack

The horror stories from the auction-rate securities marketplace are piling up, and could prove to extend the financial distress for the bigger banks and brokers. The shares of asset manager Calamos Asset Management Inc. (CLMS-NASDAQ) continues to struggle; the company is working to refinance a portion of five closed end funds that hold the securities. Two weeks ago Calamos summed up the predicament:

"The recent decision by major broker-dealers to withdraw their support of auctions and the resulting failure in the auction rate market has created uncertainty for both our preferred and common shareholders," said John P. Calamos, Sr., CEO of Calamos.

Although Calamos' assets under management have held steady, their reputation is certainly on the line. The backlash in the distribution channel is starting to build, as retail brokers begin to hit them where it hurts. Retail brokers were circulating an email promising a fight:

We need to keep up the pressure on the issuers (Pimco and Nicholas Applegate (Allianz), First Trust, Eaton Vance, Evergreen, Calamos, Cohen & Steers, Claymore, Nuveen, Blackrock, etc.). The branch office I work in has 30 advisors, many of whom own auction rates.

Our managers are not allowing any wholesalers from these companies, or any company which has issued auction rates, in to our office to sell any of their products. All of Wall Street needs to be locking these companies out of their offices. We need to hit their bottom line, otherwise they don't have much incentive to cash us out and they will continue to drag their feet.

Please get any broker you speak with to have their office do the same. As for all the clients, they need to call their brokers and tell them to lock these companies out of their offices.

Calamos’ stock has been nearly cut in half since the issues came to light, and offers a tempting valuation if they can work out of the problems without taking a big hit to their balance sheet. But on Main Street, where between $30 billion to $60 billion is locked up due to the fiasco, angst is building over the ultimate value of the securities:

The Wall Street Journal reported on Friday that the UBS markdowns will range from a few percentage points to more than 20%, and that they reflect the estimated drop in value of the bonds now that there are no buyers. The bonds will be marked back to face value if the auction-rate securities market rebounds, but the move by UBS (UBS) has increased worries that these securities may be worthless.

“We are working with clients, on a case-by-case basis, to address their immediate liquidity needs, offering such solutions as margin loans and lines of credit at preferred lending rates,” says Karina Byrne, a UBS spokeswoman. Fortune

Ultimately, like everything on Wall Street, buyer beware.

Calamos admits that even he was blindsided when banks let the auctions fail.

“They dropped a bomb on us by letting the auctions fail. It is unprecedented,” says Calamos. Much like the investors, he believed the auction-rate market would function smoothly, despite the fact that the big banks were not legally obligated to keep the auctions running smoothly.

Not even cash is safe on Wall Street.

Wake up Wall Street. Joe Investor is hurting too
Fortune

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