Auction-rate securities were a clever idea for normal times. Issuers sold debt securities that would remain outstanding for decades, but weekly auctions run by brokers gave the investors regular opportunities to sell.
The issuers — governments and businesses — received long-term financing at relatively cheap rates and investors held securities that looked short term but paid better than money market. The catch: Those auctions failed in the panic of 2008 because buyers all ran for the hills.
Over time, the outlook improved for many auction-rate securities owners. Regulators pressured brokerages to buy out their clients. Some issuers refinanced those debts and repaid their investors. But the auctions themselves still don’t function to this day.
Muggia was not so fortunate. He says he is still stuck with more than $1 million of auction-rate securities and thinks the state should finally do something about it. “It’s just so wrong to do business this way,’’ says Muggia. “We were [promised] liquidity every seven days and it’s been three years. It’s embarrassing for the state of Massachusetts.’’
For the record, Muggia is no financial rube, and he’s not crying poverty. He is the chief executive of Westfield Capital Management, a Boston investment firm that manages $16 billion for clients. Muggia put his own money into the auction-rate securities.
It’s hard to determine how many people and how much money remain trapped in the state’s auction-rate securities. Those securities currently pay an interest rate of 0.24 percent, according to Muggia. Unless something changes, they will remain outstanding until Dec. 1, 2030.
Muggia isn’t the only person who believed, at one time or another, that the state should refinance its auction-rate securities and repay investors. Tim Cahill, who was the state’s treasurer in 2008, said exactly that at the time. “We certainly don’t want to be in them and tie people’s money up,’’ Cahill told the Globe’s Beth Healy in July 2008. “We’re not getting hurt. But we think it’s in everyone’s best interest if we refinance.’’ He said the state would do that within a month, though obviously it did not.
