Oppenheimer Frustrated At Elusive Auction-Rate Solution

As many holders of auction-rate securities remain frustrated at their inability to find a way to sell the instruments, Oppenheimer & Co., which sold some of the shares, says it is frustrated, too.

The Federal Reserve Board's decision to close down the Primary Dealer Credit Facility appears to close off that facility as a potential liquidity pool, Oppenheimer said in a February update that some of its clients received.

Oppenheimer, a unit of Oppenheimer Holdings Inc. (OPY), had hoped that the facility, or a subsequent facility, would remain in place, it said in its update.

In an e-mail Thursday, the company said, "Oppenheimer is disappointed that the primary dealer credit facility, which may have provided liquidity to investors holding auction-rate securities, has been closed. We will continue to try and find a liquidity source for our clients holding acution-rate securities."

Oppenheimer previously said it spent time, effort and money to build a government-securities trading business to qualify as a primary dealer in the hopes of attaining a liquidity facility from the Federal Reserve Bank of New York.

In its update, Oppenheimer said it understands the frustration of its clients whose funds are trapped by the continued failure of the auction-rate securities market. "We remain equally frustrated at our inability to find a liquidity solution, or a means to compel issuers or underwriters to redeem or otherwise provide liquidity for these securities," it said.

The once $330-billion auction-rate market froze in February 2008 as market participants stopped buying the securities as the credit crisis intensified.

Oppenheimer has pursued "virtually every avenue we could to find a solution to the problem," and can't offer potential solutions other than the continued redemption by issuers and its continued efforts to convince legislators and other government officials of the need for a government-sanctioned solution to the liquidity issue, it said in its most recent update.

The company has been pressing issuers to redeem or otherwise liquidate auction-rate securities and has made a claim against several of the lead underwriters, alleging that the underwriters should be required to make any required restitution "since they (along with the issuers) artificially supported the auctions," it said.

Some issuers of auction-rate preferred securities, such as Nuveen Investments (JNC), continue to actively pursue redemptions with the issuance of alternative securities to replace the shares, Oppenheimer noted.

In December, Nuveen announced that it had arranged up to $2.5 billion in liquidity support from three major financial institutions for its leveraged municipal closed-end funds to issue variable rate demand preferred shares, which include an unconditional "put" feature backed by a major financial institution.

Bill Adams, executive vice president at Nuveen, said Thursday that the asset manager continues to make progress and expects to issue the VRDPS through private offerings early this year.

Fifteen Nuveen funds have also issued MuniTerm Preferred shares, a fixed-rate form of preferred stock with a mandatory redemption period, totaling more than $600 million, which has permitted the funds to redeem 50% to 100% of their ARPS, Adams said. In addition, as many as 20 Nuveen funds have registered to issue MTPs, subject to market conditions, he said.

Nuveen's funds had $15.4 billion of ARPS outstanding when the markets seized up in 2008 and have redeemed $7.1 billion of that. The company remains committed to its goal of refinancing 100% of the APRS issued by its funds in a way that is to the long-term benefit of the funds' common shareholders, Adams said.

Oppenheimer also said it will continue to work with regulators to resolve outstanding issues and investigations, but added that any resolution will depend on acknowledgment of its financial and regulatory constraints and "the resulting limited amount of liquidity available" to it to address the issue. "At present, Oppenheimer does not have the financial capacity to repurchase, within [Securities and Exchange Commission] capital requirements, a significant amount of its clients' ARS without" a liquidity pool, it said.

By Daisy Maxey; Dow Jones Newswires; 212 416 2237; daisy.maxey@dowjones.com

Oppenheimer (NYSE:OPY)
Historical Stock Chart
From Jun 2024 to Jul 2024