Auction-rate deals bypass big players: Local companies watch, wait as Wall Street settlements over securities benefit smaller investors

Aug 23, 2008 (Pioneer Press - McClatchy-Tribune News Service via COMTEX) -- MGI | Quote | Chart | News | PowerRating -- Aug. 23--Minnesota investors, nonprofits and small businesses who got burned buying auction-rate securities likely will get some relief soon, thanks to a string of settlements with big Wall Street banks.

But bigger local companies like MoneyGram International that lost hundreds of millions on the same type of investments so far have been excluded.

That doesn't mean executives at those companies aren't eyeing the deals closely, in hopes they might somehow benefit.

Terms of the eight settlements -- with Citigroup, UBS, JPMorgan, Morgan Stanley, Wachovia, Merrill Lynch, Goldman Sachs and Deutsche Bank -- vary, but all of them essentially require firms to buy back the auction-rate securities that investors haven't been able to unload.

Auction-rate securities were long-term debt, like bonds, that are sold as short-term securities at periodic auctions, where the interest rates were set. They were marketed as highly safe and liquid. But earlier this year, as the worsening credit crunch caused investors to grow wary of complex investments, the market for the securities began to dry up. With no willing buyers, investors found themselves unable to cash out.

The settlements aim to make those investors whole.

Noticeably absent from the deals are reparations for larger institutional investors like St. Paul-based Lawson Software and ADC Telecommunications in Eden Prairie, which bought tens of millions of dollars worth of the securities and were forced to write

down their investments after the market failed.

"One school of thought is institutional investors are more sophisticated than retail investors ... so it's not surprising that these settlements don't extend to institutional investors just yet," said Matt Boos, a partner at the Fredrikson & Byron law firm in Minneapolis.

"The defendants (broker-dealers) are agreeing to participate in a process with investors where they don't challenge liability," said Boos. "Institutional investors may try to use that in proving liability in court."

Lawson got rid of all of its auction-rate securities last quarter, said spokesman Joe Thornton. ADC still holds some.

St. Louis Park-based MoneyGram lost at least $1.6 billion over the past year on investments in auction-rate and mortgage-backed securities.

"We are aware of the 'settlements in principle' between several Wall Street banks and various regulators," said Lynda Michielutti, a spokeswoman for MoneyGram. "We are continuing to monitor developments closely."

But some wonder if the settlements open the door for investors holding other kinds of illiquid securities.

The city of Duluth, which purchased $3 million in asset-backed commercial paper it hasn't been able to sell, is watching the settlements, said Genie Stark, the city's director of finance.

"If there is a responsibility to holders of those types of investments, why is there not a responsibility to the holders of these types of investments?" she said.

The city of St. Paul filed a lawsuit against Merrill Lynch for the firm's hand in selling "unsuitable" asset-backed commercial paper to the city.

"Although the underlying cases are a bit different, the city of St. Paul ... intends to vigorously prosecute our civil claims against Merrill Lynch until we get the public's money back," said John Choi, St. Paul city attorney.

Nicole Garrison-Sprenger can be reached at 651-228-5580.

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