Auction-Rate Holders Disappointed with Pimco

Preferred holders are fed up with waiting for Pacific Investment Management Co. (Pimco) to figure out a course of action to help those suffering after the collapse of $330 billion auction-rate securities market.  

Pimco is struggling to find a comfortable medium between their preferred holders and investors in the funds’ common shares, which trade on exchanges like stocks. The two groups have competing interests, therefore, making it difficult for the fund managers to refinance ARS without hurting the common holders by increasing costs.  

Municipal-bond issuers control a majority auction-rate market, so when the companies insuring these bonds were threatened by reduced credit-ratings, the market failed. The crisis left investors alarmed and with $63.4 billion of illiquid preferred shares.  

One holder told Bloomberg.com he bought “several hundreds of thousands of dollars” in the auction- rate preferred shares issued by Pimco’s closed-end funds before the freeze in February. Shareholders similarly situated are disappointed in Pimco’s lack of communication and failure to develop a solution. They have a just reason to be frustrated.  Pimco is the only top five manager of publicly traded closed-end funds without a plan for their investors to cash out.  

According to a company spokesman in Christopher Condon’s May 30, 2008 article, Pimco is “devoting considerable time, energy and attention to finding an approach that, consistent with our fiduciary obligation, reconciles the competing considerations facing common and preferred shareholders.”  Only time will tell how Pimco ultimately decides to treat investors.

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