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KAI RYSSDAL: We've touched base a couple of times recently about auction-rate bonds. That's the market that state and local governments have been going to to raise money at relatively low interest rates. The auction-rate market is short term, which means investors wouldn't have to tie up their money for too long. Until recently, it was pretty reliable. But Marketplace's Bob Moon reports the credit squeeze could mean the end of it.
BOB MOON: This is just the latest chapter in a crisis of faith spreading through the financial markets. It seems everybody, from wealthy individuals to big corporations, has just stopped believing in this type of short-term bond investing. Now there are signs the once-attractive market doesn't have a prayer.
JACOB ZAMANSKY: I think the auction-rate securities market is dead and gone.
Attorney Jacob Zamansky specializes in securities issues in New York. He says he's been getting calls from investors who've been trying to get out, but are being told they can't:
ZAMANSKY: I'm hearing from investors who are unsophisticated, and some very sophisticated investors. They're astounded that their brokers are telling them now they can't get their money out.
Zamansky says the bond-issuers have relied on banks as buyers of last resort -- but the banks are now refusing to make good, and investors are left holding the bag:
ZAMANKSY: On their monthly statements, it usually lists these auction-rate securities as cash equivalent, like a money market. So people that thought that they were in short-term cash to pay bills like tax bills that are coming up to buy a home, don't have access to that money.
The bond issuers are scrambling to get out of the market, too, since they're on the hook for high-interest penalties. Paul Rosenstiel is California's debt manager. He says the state is desperately trying to refinance:
ROSENSTIEL: What we're hoping is there's going to be some way that those bonds get converted to a fixed-rate over a long enough period of time that it doesn't create a glut in the market.
High demand for refinancing could lock in higher rates for years to come. And Rosenstiel says in the end, taxpayers will be footing much of that bill.
In Los Angeles, I'm Bob Moon for Marketplace.