1) Since mid-Feb. 2008 (and perhaps earlier), the auctions for all or substantially all student loan backed ARCs have failed because there were not enough bidders and because the sponsoring broker-dealers decided to not to support these auctions by placing the clearing bids necessary to insure the success of the auction. Stated another way, the broker-dealers decided to preserve their capital let the auctions fail.
2) The broker-dealers who marketed student loan backed Arcs to their clients (mostly high net worth individuals) are probably not going to voluntary redeem these ARCs. They are going to have to be compelled to do so by a court order or an arbitration award. They are playing for time and keeping the money we invested in ARCs since they are currently cash and credit strapped.
The best hope for an early redemption of the ARCs are the issuers of the ARCs, not the broker-dealers.
3) The high net worth clients of these broker-dealers who purchased ARCs believing that they were equivalent to cash who are going to be given the most attention by their broker-dealer are those individuals with legitimate and pressing needs for the cash which is locked in their ARCs. Their broker-dealer may offer them a 70-80% (of par value of ARCs) loan at an interest rate which is slightly lower than or may equal the interest rate being paid by the issuer of the ARCs. Such loans would be 100% secured by the ARCs or other securities--the problem here is that if the issuer(s) of the ARCs pleged as security to the borker-dealer should default, the borrower would remain obligated to repay the broker-dealer the full principal amount of the loan plus accrued and unpaid interest (remember these would be secured loans and the broker-dealer would likely have actual possession of such security).
Why, one might ask, doesn't the broker-dealer simply buy the ARCs from its clients instead of engaging in this complicated secured loan procedure? The answer appears to me to be that the broker-dealers want to be fully secured, and they do not want to take the ARCs into their inventories and thereby assume the risk of the issuers' defaults--they want to leave the risk of default on its clients (the borrowers).
CAUTION: In order to obtain such loan secured by ARCs and/or other security the broker-dealer may require its client to sign a full release of any actual or potential liability for any claim the client may have against the broker-dealer relating to the purchase of the ARCs.
Sounds like a very bad deal to me. Before agreeing to any such loan, the client should have all loan related papers reviewed by independent legal counsel employed by the client.
4) The student loan backed ARCs can be divided into two groups: a) those issued by state or other governmental agencies, and b) those issued non-state (private) entities--you need to check to see which type of entity issued the ARCs you hold. I am told that those issued by private issuers are much more at risk of default than those issued by state governmental agencies and that those in the latter group are more likely than the others to be redeemed or paid until maturity.
The logic is that no state wants to jeopardize its reputation or credit rating by permitting one of its student loan bond issues to default. Non-state issuers have fewer such concerns or pressures. I have been informed that so far traders see no practical exit strategy for these student loan ARCs.
5) This problem is so big in dollar terms, so spread out across the country and beyond, and the broker-dealers are currently under such financial stress that these matters, which the broker-dealers are going to insist be resolved on a case-by-case basis, are not going to be resolved to our satisfaction (redemption of our ARCs at par) any time soon and perhaps not ever.
Hopefully, the SEC and/or Congress promptly gets involved. Media attention to this problem might be of some help in convincing the broker-dealers to do the right thing.
6) They will not be redeemed, that option will never be approved by trustees or else they will leave themselves open to lawsuits from taxpayers of the states. Second and most important, just the student loan arcs have amendments to thier prospectusus dated last year(so you need prospectus AND amendments) that basically say the "trusts" cannot pay more then t bill plus 120 bps on any 12 month period on average. This will cause student loan arcs to reset to 0 coupons and many already have. As far as I know these trusts are irrevocable, and each arc is it's own trust with it's own trustees.
Source: When the collapsed Auction Rate Securities (ARS) market gets personal
I maintain this web page to gather as much information as possible and spread the word to help other victims of this financial misrepresentation and alleged crime by the major financial institutions.
I can be reached via e-mail at russkyserge@hotmail.com
Serge Birbrair and I am not just a web page publisher, but also a victim who trusted UBS and got burnt. Do YOU want to be next?
No? Don't believe everything you hear from your Financial Adviser, as they are played by the management too.