Flagstaff Auction Rate Securities

After the Flagstaff auction rate securities (ARS) market collapsed in early 2008, investors across the country were left stranded, unable to retrieve the money they invested in securities they thought were highly liquid. The $300 billion market was frozen, unable to supply the demand needed to hold successful auctions, despite the promises of safety and liquidity made by investment firms. Many investors were understandably angry that they had never been warned about the potential for such a crippling market failure – anger which only grew as they were repeatedly stonewalled by investment banks and broker-dealers seeking to limit their exposure to legal action.

Background of Flagstaff ARS

In the late 1980s, Goldman Sachs introduced a new type of variable-rate debt into the financial market – auction rate securities, long-term bonds with fluctuating interest rates determined by a competitive auction system. With slightly higher returns than most money market instruments and the promise of liquidity implied by frequent ARS auctions, these securities quickly became popular with investors in Flagstaff, AZ and elsewhere.

By the 21st century, the auction rate market had ballooned into a $300 billion behemoth; corporate and individual investors alike had poured their funds into these auction rate securities, intending to safely earn interest without being forced to commit to a long-term investment.

Liquidity Failure in the Flagstaff ARS Market Collapse

The liquidity provided by the Flagstaff auction rate securities market was not as foolproof as investment firms led many of their clients to believe. Because of the way ARS auctions were set up, liquidity was only available as long as other investors were willing to purchase the securities. To shore up auctions and sustain this image of liquidity, ARS broker-dealers routinely bid in their own auctions to purchase any unwanted shares.

By early 2008, however, investment banks and broker-dealers were well aware of problems in the Flagstaff auction rate securities market. After sustaining heavy losses in the subprime loan market and watching the credit rating of bond insurers steadily decline, major broker-dealers were unwilling to fulfill their traditional role of bidders of last resort.

Unfortunately for many Flagstaff investors, the pull-out of these broker-dealers from the auction rate securities market was devastating. Hundreds of auctions failed within weeks, causing the entire market to freeze up due to lack of demand for the now-illiquid securities.

Take Action Today

If you or your company’s finances have suffered due to losses in the auction rate securities market, now is the time to take action. Call an auction rate securities attorney today at 800-220-9341 to see if your case can be resolved with the help of our experienced legal team.