February 19, 2008 (LPAC)--Interest rates have reached "loan shark" levels in the $330 billion market for auction-rate securities, another reflection of the collapse of the global financial system. Auction-rate securities are long-term bonds designed with interest rates that reset at auctions every 7, 28 or 35 days, a method that in the past provided lower interest rates than could be obtained through fixed-rate loans, but the collapse of the global securitization scheme means that such methods no longer work as before. In recent days, there have not been enough bidders to buy these bonds as they reset, causing sharp spikes in the interest rates the issuers must pay. Previously, big banks such as Citigroup and Goldman Sachs would step in and buy the bonds at the periodic auctions they oversee, but they have ceased to do so as they are too busy trying to save themselves to support the auction-rate market.

The University of Pittsburgh Medical Center, as an example, saw the rate it was paying on one of its bond issues jump from 3.5 percent to 17 percent, and is now paying an extra $500,000 a week in interest on its bond portfolio. UPMC Treasurer Tal Heppenstall told Bloomberg that his institution would try to buy back $430 million of its bonds to cut its losses. "It's outrageous. We're AA-rated credit. We don't need to get financing from loan sharks," he said.

With bond auctions failing and interest rates soaring, municipal bond issuers are in a mad rush to convert their auction-rate bonds to other forms of bonds, which will undoubtedly raise their borrowing costs, if they can find takers.