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UPDATE: 231 Auction Rate Security Sales Fail Fri - Source

Last Update: 2/15/2008 3:46:05 PM

(Updates with more background)

By Matthew Cowley
Of DOW JONES NEWSWIRES

NEW YORK (Dow Jones)–Turmoil continued in the $360 billion auction rate
securities markets Friday as investment banks failed to sell a sizable number of
deals on offer.

Of a total 288 on offer, underwriters were unable to sell 231 auction rate
securities, according to sale results provided by a person close to the process.
The deal amounts weren’t provided in the document.

Merrill Lynch & Co. (MER) was the lead arranger on 93 of the failed transactions,
followed by Smith Barney, a unit of Citigroup (C), with 55 failed deals,
according to a list of the transactions.

On the flip side, Smith Barney led 15 of the 57 successful transactions, followed
by UBS (UBS) with nine and Merrill with seven, according to the list.

Typically these auctions are held on Tuesdays, Wednesdays and Thursdays, but due
to the recent market turmoil as well as the upcoming long holiday weekend in the
U.S., the banks opted to hold an extra auction on Friday.

Friday’s failure rate may have damped for now some nascent enthusiasm that had
started to build up in this normally relatively risk-free market, which has
become the latest to fall victim to the spreading credit market turmoil.

Auction-rate securities are initially sold as long-term bonds but are effectively
turned into short-term securities through auctions typically held every 7, 28 or
35 days. Issuers - for the largest part municipalities - reap the low financing
costs associated with short-term debt, while investors gain liquidity through the
frequent sales.

The market is an important source of financing for municipalities, while
providing an attractive option for corporate treasurers and cash managers at
investment funds to park cash for short periods of time. Banks normally ensure
that there is sufficient liquidity in the market by stepping in when auctions
fail. But with their balance sheets already overladen with leveraged loans and
other complex debt securities, banks are no longer willing to take on more
securities. As a result, investors have been left holding the bag - and issuers
have had to pay penalty rates.

There had been some signs Thursday that buyers with a longer-term investment
outlook, including hedge funds, were entering the market, but participants noted
that they have yet to make a dent in the market. Muni issuers account for between
$200-$250 billion of the auction-rate securities market. They are normally seen
as very safe as munis have historically a very low default rate.

-By Matthew Cowley, Dow Jones Newswires; 201 938 5692;
matthew.cowley@dowjones.com

-Kate Haywood contributed to this report.

(END) Dow Jones Newswires

February 15, 2008 15:46 ET (20:46 GMT)

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