Can The Power of The Internet Bring Investors an 18% Interest Rate?

2009-06-29T09:33:00.000-07:00

This blog is an experiment. It's an attempt to use the power of the Internet to turn the tables on the Wall Street firms and issuers who sold debt through an Auction Rate Municipal Structure with the promise of weekly liquidity and then abandoned the structure when the credit crisis hit. If you are not already familiar with a Municipal Auction Rate Security (also known as Municipal Reset) then it is best that you read no further and move on to something else because this is a sophisticated product (yet simple strategy) that does involve risk.

If you are not intimately familiar with the workings of Municipal Resets I suggest you learn about the auction process here. Once you fully understand the process then you can begin to appreciate the plan I put forward here to earn an 18% annualized interest rate through the power of the Internet.

THE PLAN:

The Issuer: New York State Energy Research and Development Authority
The Actual Underlying Credit: Brooklyn Union Gas dba Keyspan Energy Delivery New York (a subsidiary of National Grid PLC)
Issue Size: $55,000,000
Cusip Number: 649842CD1
The Rate: Variable - set weekly by auction
Maximum Allowed Rate: 18%
Maturity: June 1, 2025
Minimum Investment: $25,000
June 29, 2009 Credit Ratings: Moodys: A3 S&P: A
Link to MSRB Information on this bond.
Link To National Grid Bond Information.

Anybody who is interested in participating should check into every single aspect of what is stated on this blog as you proceed at your own risk.

Now for the plan. The weekly auction for this bond has failed for several consecutive weeks. Even at the failed rate, the bond pays a rate that is substantially above a typical tax free money market fund since the failed auction rate is tied to a multiple of LIBOR. On the auction date of 6/25/09 the rate was .769%. Click here to see more recent information. Since this is an auction, if enough individuals bid 18% to make this auction successful then the issuer is forced to pay investors 18% since that would be the lowest bid to make the auction successful. Why 18% ant not 20%? ...because 18% is the maximum rate set in the official statement for the bond. It's that simple. If you bid 18% and the rate comes in lower then you don't win the auction and do not purchase any bonds. You'll only get the bonds if they pay 18% for the next week. I envision a scenario where the word of this plan spreads over time and at some point enough 18% bids make this auction successful and at an astounding rate of 18%.

The next question you should be asking...OK, what happens if enough investors follow this blog and bid 18%, the auction is successful and I own the bonds?

Well, first of all you'll earn an 18% annualized rate for the next week along with all the other bidders in the auction. Now the liquidity risk comes in. In order for this to continue working, you and enough other investors must put in a "Hold Order" or new buy orders at 18% for the next and each weekly auction to make the auction and this strategy successful. A hold order is put in by an existing holder at the rate he wishes to continue holding the bond. If the lowest rate bid comes in at 15%, anyone with an order to hold at 18% will end up selling the bond at par. The risk comes in when not enough buyers show up and the auction fails. In this case, instead of getting 18%, the bond resets at the maximum rate for a failed auction which is the LESSOR of 18% or a multiple of LIBOR determined by the rating on the bond (currently at 250% of 1 month LIBOR based on a single A rating or .769%). However, if enough investors find this blog (you can help by sending wealthy, financially savy friends a link) and follow the plan we should reach a critical scale of enough investors keep the auctions successful at 18%.

So there you have it. If you have any questions please leave a comment. Don't even consider doing this if you can't afford to tie up your investment until the maturity of the bond. If you are considering moving forward with a bid it would be helpful if you became a follower of this blog so we can get some kind of indication on how many independent investors are on board. Most of the online discount brokers provide access to this auction.

THIS PLAN CAN ONLY SUCCEED IF YOU CONTINUE TO PUT IN YOUR 18% BUY/HOLD ORDER AT EVERY AUCTION AND SHARE THIS PLAN WITH OTHERS WHO HAVE THE FINANCIAL SOHPISTICATION AND RISK TOLERANCE TO DO THE SAME.

DO YOUR OWN DUE DILIGENCE!

Municipal Auction Rate Plan: Earn Above Market Rates

Can The Power of The Internet Bring Investors an 18% Interest Rate?