International Investing

With all the talk about the auction failures this is the first article that discussed the accounting changes that caused it. The market was a zombie for months, only propped up by the banks. When they pulled out the whole market ground to a halt:

The demand for auction-rate securities dried up sometime last year, and became absolutely arid in 2008. This shift was driven by a March 2007 decision by the Financial Accounting Standards Board that the heading “cash equivalents” should be eliminated from balance sheets and cash-flow statements. The FASB recommended that cash-flow statements should present only flow related to cash. Items currently classified as cash equivalents would be classified in the same way as other short-term investments.

Corporations responded to this by moving out of the auction-rate securities so that their balance sheet cash positions would not take a hit. This meant that many corporations were no longer in the market for the securities. As corporate demand for auction-rate securities vanished, banks found themselves having to soak up more and more inventory. The capital commitment required to do this grew at the same time the banks faced challenges from other parts of the credit markets. Last week they decided that against committing additional capital to supporting the auction, and let them fail.