Little GTO

The investor community is up in arms that Wall Street firms are not supporting auctions (never mind that regulators are poised to investigate firms for bid rigging and supporting auctions which would have failed if not for firm support, unbeknownst to many investors).

It appears as though ARS was marketed with a kind of guaranteed takeout or GTO. ARS marketers allegedly reassures brokers and investors that if auctions did not receive sufficient interest to be successful, the firm running conducting the auction would step in with its own capital to ensure a successful auction. Up until now, this was true in the vast majority of potentially troubled auctions. However, just because it is true, doesn't make it right.

Much of my background comes from the trading side of the business. One of the first things one is taught is, as a seller, to never offer a guaranteed takeout to a buyer. In other words, don't sell a bond to someone with the promise that you will buy it back at a predetermined price. For one thing, do to so is an NASD violation and market conditions may change to where this promise is impossible to keep. , what is taboo (and illegal) in the cash bond market was de rigeur in the ARS market.

The questions now become: What happens first? Do investors launch lawsuits against Wall Street firms or do regulators (and attorneys general) begin fining Wall Street firms. Both could be on the horizon.

Also, think the ARS markets are coming back soon? Guess again. Muni issuers are just as upset about failed auctions (double digit interest rates will do that). They will more likely tap the conventional bond market. Another "enhanced" product bites the dust.