Wednesday, February 27, 2008

ARS issuers beg SEC for help

(Naked Capitalism) A group of hospitals which has issued auction rate securities and are now choking on the "failed auction" rates have petitioned the SEC to allow them to buy back the debt. The notion is that they'd either hold the debt off the market until conditions normalize, or would retire it completely, replacing it with longer term debt.

The article on this topic in the Wall Street Journal doesn't mention how the hospitals intend to fund these purchases (presumably via bank debt). It does note that some issuers are barred from pursuing this avenue because their indentures prohibit them from making bids for the debt.

So get a load of this:
The SEC is weighing the requests and hasn't come to any decision, according to people familiar with the matter. The agency is evaluating concerns about whether a borrower's participation in setting the clearing bid in an auction for its own debt would be market manipulation. Issuers of debt would have a strong incentive to support the market price to avoid triggering higher interest rates.

The SEC is worried whether this constitutes market manipulation while state and city finances go into crisis? Yes, this is market manipulation, except, guess what, there is no functioning market right now, hence no damage.

Certain types of market manipulation are routinely permitted and exempted, such as stabilizing transactions in a public offering or an underwritten call. And even though there were apparently concerns about manipulation in this market a few years ago; the Journal mentions a settlement reached with 15 brokerage firms that led to the development of best practices. Nevertheless, dealers were permitted to bid at auction without it being deemed manipulation; in fact, it's the absence of deal bids that has elevated this situation to a crisis.

Here we have an SEC that, as Floyd Norris told us yesterday, pushed to weaken Sarbanes Oxley. Note this isn't a trivial issue; the SEC is responsible for administering Sarbox. Even worse it shows no interest in blatant violations like late in the day leaks to the media that seem designed to kill shorts (most recent example: the Ambac "hey maybe we have a rescue" CNBC story that led to a 250 point rally in the Dow and more important, a 30% increase in Ambac's stock price before the session finished).

The required way to handle material announcements during trading hours is to call a halt and make a statement or release the news after trading hours. Technically, this is a violation of the New York Stock Exchange's rule, "Timely Alert Policy," but the NYSE is under the SEC's authority.

So for the SEC to suddenly be concerned about strict application of the rules seems rather out of character. It wouldn't be all that hard to come up with a temporary, narrow, provisional carve-out. But small fry like hospitals clearly don't rank very high in the SEC's list of priorities.

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