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Pinnacle Receives Auction-Rate Securities Settlement; What about Every Other ARS Investor?

Posted by Larry Doyle on August 31, 2009 12:34 PM |

How can auction-rate securities investors receive liquidity from the remaining $165 BILLION in frozen ARS securities?

Let’s review a recently announced settlement that Pinnacle Airlines negotiated with Citigroup. Bloomberg reported this morning, Pinnacle Airlines Flight From Auction Rate Costs $16 Million. Pinnacle is under severe cash constraints with a $109 million note maturing in early 2010. Bloomberg provides details how Pinnacle received liquidity along with a call option to repurchase the ARS from Citigroup at the same price it is selling the ARS. What does it all mean? Bloomberg highlights:

Pinnacle received $112 million from Citigroup Global Markets Inc. for its $128 million auction-rate portfolio, according to Williams. The $16 million loss amounted to a 12.5 percent discount. The deal allows Pinnacle to buy the securities back at the same discount anytime during the next three years, Williams said.

“We are pleased to have been able to provide a liquidity solution to our client,” said an e-mailed statement from Danielle Romero-Apsilos, a spokeswoman for Citigroup, which sold Pinnacle the auction-rate securities.

Sense on Cents asks the following questions:

1. Would Citigroup offer this settlement to every other investor to which it sold ARS?

2. What do ARS investors who are regular readers of Sense on Cents think of this settlement?

3. Does this settlement preclude investors from participating in a larger settlement that may include penalties?

4. Why shouldn’t other banks, brokers, and money managers who sold and marketed ARS in a fraudulent fashion be mandated by the courts to provide a temporary liquidity facility similar to this? If these entities, which engaged in the fraud, maintain they can not ‘afford’ this settlement, isn’t that a de facto admission of guilt and an ongoing perpetuation of the fraud?

When will ALL investors in auction-rate securities receive an expedited settlement which leads to full and total restitution? The feet dragging on behalf of issuers, banks, regulators, and the courts is a gross injustice of massive proportions.

Perhaps the claim embedded in the Amerivet Securities complaint against FINRA can help to unlock the ARS mess and expose the incestuous relationship between the financial self-regulator and Wall Street. At that point, perhaps ARS investors may move closer to receiving their funds and some justice from this fraud.


  • coe

    Somehow I have to believe that investors were not contemplating that a 12.5% discount would represent “liquidity” on an investment that was touted as a cash substitute. Folks with their backs to the wall operate under emergency principles. And I’m sure the gracious offer to allow the investor in this case to repurchase the securities at the discounted price should evoke for many the classic line, “If you liked them at par, you’ll love them at 87!”

    Just curious, LD, doesn’t it seem that the drive to design and introduce new structured products (most with juicy spreads) has totally backfired on all sorts of levels. I am quite convinced that the complexity and potential ramifications of many of these products seem to have far outstretched all abilities to grasp them on the part of mediocre Wall St management, day late and a dollar short regulators, steeped in tradition accounting standard setters, venal “bucket shop” salesmen, and the misinformed but all too easily seduced investing public.

    When this chapter of the history book is written, don’t expect it to treat structured product innovation in the last two decades too kindly.

    Kind of ironic (moronic?) that these constituencies seem to be turning toward these very same “structured solutions” to power out of the mess created.

  • Larry Doyle


    I concur. I was always struck by a number of the quants who worked on structured transactions. What exactly were some of these quants putting in that special sauce? Lots of embedded and disguised risks for investors. Did management and regulators fully appreciate the risks? Prior to appreciation, you are correct that often they did not even understand the risks.

    In regard to using the ‘same structured solutions’ to get out of the mess, these deals are typically not ‘bought’ but ‘sold.’

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