Auction Rate Securities Fraud Lawyer

Why Did the ARS Market Collapse?

As of now, there is no single clear answer to the question of what caused the auction rate securities market to collapse seemingly overnight. Every market is driven by many complex factors that cannot be consistently predicted or controlled. Because of their design – the adjustable interests based on regular auctions – auction rate securities are especially sensitive to changes in the economy and many other factors that can impact their value. Based on the information available so far, however, there are two major factors that seem to have contributed to the market collapse.

First, instability in the market can be traced all way the back to last summer’s nationwide economic upset, commonly referred to as a credit crunch. A “credit crunch” is a set of economic conditions that have made lenders wary of issuing loans or other forms of investment capital. This drives up the price of loans, sometimes to the point where business is hardly getting done at all.

Many believe that 2007’s credit crunch was caused by the widespread practice of banks issuing subprime loans: mortgages with a very low initial interest that increased after a certain point. Thousands of people who took out these loans were unable to repay them, creating financial problems for their banks and investors in the real estate market. These problems began affecting other markets as unease over the economy spread and the credit crunch started up.

The second important factor is the unethical behavior of several banks when dealing with these changes in the markets. Realizing that auction rate securities could soon lose their value, these banks allegedly sought to dump their securities on unwitting investors. They accomplished this by misleading their clients about the nature of auction rate securities and by manipulating the market to make it appear more stable than it really was. In February 2008, banks stopped buying unwanted securities, contributing to the collapse of the market.

If you have lost money in the auction rate securities market collapse and suspect your bank may have misled you, contact an auction rate securities fraud lawyer at 800.220.9341.