Updated
The national credit crunch is starting to hit Silicon Valley start-ups. We’ve heard that venture-backed companies with Comerica money market accounts have had their accounts frozen, and when we asked Comerica spokesperson Sara Snyder, she didn’t deny it.
Snyder didn’t explicitly confirm anything either, but pointed to this New York Times article about problems in the auction-rate note market (where Comerica has invested its money market accounts) and said, “At Comerica, we are working with customers on a case-by-case basis to assist them with their liquidity needs.”
[Update: Snyder has sent us a statement from Comerica Securities President Ross Rogers with more clarification. Looks like what we initially heard was wrong -- startups with Comerica are affected, but not through their money market accounts, just direct investments in auction rate securities.]
Venture Wire is reporting on an informal survey of 60 venture-backed start-ups that found that 20 percent of them had money in auction-rate notes.
Those notes, according to the New York Times, make up a $330 billion market that recently came to a virtual standstill. They represent debt from city governments and other tax-exempt organizations, and the rates are reset at auctions every week.
In mid-February, the demand for those notes completely dried up. In an account of his own problems with auction-rate notes, VC Fred Wilson says the trouble can be traced back to the subprime mortgage crisis, which is hurting the bond insurers who usually improve the credit quality and ratings of the notes.
It’s already widely known that the bursting of the subprime bubble is ravaging Wall Street (see, for example, this piece about problems in the buyout industry), but this is one of the first times we’ve seen the direct harm to start-ups.
Snyder said that for privacy reasons, she couldn’t give us any details about the specific companies affected.
9 Comments
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hwu said:
FYI auctions are a 330 bln market not 330mm.
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Anthony Ha said:
Argh, that’s the second time I’ve made that mistake today. Fixed!
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Brendan M. O'Connor said:
For those looking for a place to sell your auction rate securities, I encourage you to visit the Restricted Securities Trading Network (RSTN) at http://www.RestrictedSecurities.net. The RSTN is the largest centralized secondary market for ARS. The firm I work for, Restricted Stock Partners, manages the RSTN. Alternatively, please feel free to call me directly at 212.668.3909 or via email at boconnor@restrictedstockpartners.com with any questions. Regards, Brendan O’Connor
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mike post said:
Anthony- you should understand what you are writing before putting it down on paper. The liquidity issue is with Auction Rate Securities, NOT Comerica’s on balance sheet money market accounts . The article is misleading and inaccurate.
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Anthony Ha said:
Mike — Could you elaborate? I’ll be the first to admit that I’m not a finance expert, and I’ve been trying to hook up with Comerica for further clarification. But again, what we’ve been hearing (not from Comerica, but from other sources) is that the liquidity issue in the auction rate market has affected Comerica’s money market accounts. Is this just flat-out wrong?
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Anthony Ha said:
Mike - OK, looks like you were right, and what we were hearing was wrong. See the update above.
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ESER.org said:
As yet another unfortunate investor in these Auction Rate Securities, I’ve been befuddled that I can negotiate a price for durable goods on EBay any day-of-the-week, but I can’t get my stock broker to find a buyer for my Auction Rate Securities — no matter what discount I’m willing to sell at. Every asset has val\
ue, it’s just a matter of discovering the price.So, we’ve created an electronic secondary market at ESER.org for investors to directly buy and sell Auction Rate Securities. The goal is for ESER.org to enable price discovery for illiquid Auction Rate Securities.
It’s frustrating that none of the banks that have previously back-stopped the auctions of these securities are willing to step in and redeem the issues from their clients.
We’re running ESER.org (Electronic SEcurities Registry) at http://www.eser.org as a public-service: sellers are free to list their Auction Rate Securities for sale; and buyers are free to browse the listings and negotiate pricing and settlement with the sellers.
Hopefully, a vibrant secondary market, such as ESER.org, will allow investors to cash-out of these illiquid Auction Rate Securities.
-ESER.org (Electronic SEcurities Registry): http://www.eser.org
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Yuri Ammosov said:
Looks like there’s a bit too much advertising in comments. Do you guys ever moderate comment spam?
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Anthony Ha said:
@Yuri-
We do moderate comment spam, but we definitely need to do a better job of it. I don’t know that that’s a huge problem in this particular story, though — most of the self-promoting comments are borderline acceptable. And by borderline I mean, “not obviously written by robots.”
6 Trackbacks
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