Definition: Auction-rate securities were sold to investors by investment banks as money market funds with a higher return. Normally, they are fairly safe. Their return is set at weekly or monthly auctions run by broker-dealers. Their underlying value is supported by either long-term bonds or preferred shares of companies. The return is actually the interest rates set at the auctions. At its height, the auction-rate securities market was $330 billion.
In February 2008, the return on auction-rate securities plummeted when no one was willing to bid at the auctions. Investors found out that these funds were not as safe as money markets. The investment banks that sold them did not make good on the investments. Many state regulators forced the banks to repay the investors. Regulators claimed the auction-rate securities were sold as safe funds, and the banks misled their investors. (Source: Bloomberg, Oppenheimer May Seek TARP Funds to Repay Investors , March 24, 2009)
