You know those big settlements Merrill Lynch, J.P. Morgan, Goldman Sachs and others have made with New York Attorney General Andrew Cuomo? Well, chances are you don’t have to worry about them unless you’re a high-net-worth investor who had at least $25,000 you wanted to sock away in a vehicle earning more than a money market account that was considered just as safe as one.

I’m talking about auction rate securities, debt instruments for which banks hold frequent auctions to determine their yield and give folks a chance to sell them. They were billed as safe alternatives to low-yielding money market accounts. But the market for auction rate securities froze this winter, a victim of the credit crunch. And many investors couldn’t get their money out.

Companies with cash that wanted higher-than-money-market returns were typical buyers of auction rate securities. Best Buy, ADC Telecommunications, Lawson Software and Park Nicollet Health Services were among the local organizations stung by the auction rate freeze.

Now big brokerage houses are settling for millions thanks to eager attorneys general around the country, although the settlements tend to favor individual investors, nonprofits and small businesses more than big publicly held companies. Since it’s been in the news, I was curious about who was going to see this money.

So I called up a broker in the Twin Cities with a few hundred clients. He said that only a couple of dozen of his multi-million dollar clients own auction-rate securities. And while they’ve been inconvenienced by not having access to their cash for the past few months, they will be compensated for the full amount they invested by mid-fall because of said settlement.

What about small fries like myself? Did this mess impact us even if we’ve never heard of an auction-rate security? I e-mailed Ross Levin, a financial adviser from Accredited Investors and liked his quote so much that I thought I’d share it here:

“Think about them as the second-hand-smoke issue for small investors,’’ he said. “Many did not invest in these vehicles directly, but they invested in the stocks of companies that owned them or mutual funds that held them.”

Well, that doesn’t sound too good. Not that it’s terribly unusual these days. Whether we’re talking about the sluggish mortgage market, the frozen student loan market or financial companies that make up a large swath of the S&P 500, us little guys are feeling the pain of these complex financial instruments when their markets go awry.

Are you an auction rate securities owner? Heard any other trouble brewing in the market?

This entry was posted on Thursday, August 28th, 2008 at 5:47 pm and is filed under investing. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.