Forbes, Robert Lenzner 07.17.08, 8:53 AM ET
...Undoubtedly, this spike in bank shares was due in large part to hedge funds, which began covering some of the massive short positions they've built up over the past 18 months. For example, billionaire George Soros--Croesus was told--has covered much of his shorts in financial stocks. Why chance another public policy move by regulators to shut off this automatic feeding trough?...
Croesus has been informed about a disheartening problem at Merrill Lynch (nyse: MER - news - people )--$6 billion of illiquid securities, called auction rate preferreds, that are owned by some 40,000 customers of the thundering herd.
It seems these 40,000 investors can't sell these supposedly secure money-market-type instruments, which require auctions, and turn them into hard cash. And the issuers of these securities--closed-end mutual funds, like some in the BlackRock (nyse: BLK - news - people ) group, municipal authorities and student loan organizations--can't raise the cash to pay off investors.
It was some months back that a shocked Croesus learned about auction rate preferreds, which represent an asset class worth $360 billion in the market. Soros and others of his ilk even admitted to Croesus that they had never, ever heard of them.
As a Comerica Securities memorandum explains why cash doesn't always keep pace with these instruments:
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