While attempts to clean up the mess in the auction-rate securities continue, and are making progress, many of the tentative rescue plans are incredulously relying on repackaging the securities for purchase by money market funds. Money market mutual funds were never allowed to purchase ARS, or ARPS (auction-rate preferred securities), due to the lack of a "hard put", and we think it's very unlikely that they will want to become affiliated with the tainted security class at this point.

Auction-rate securities were clearly supposed to be classified as non-cash equivalent investments according to statements by accountants, media, regulators and accounting standards bodies. Our Money Fund Intelligence August 2006 issue said, "PricewaterhouseCoopers recently took another shot at auction rate securities ... saying these ... 'may also have been inappropriately classified as cash equivalents' by corporations, according to a Wall Street Journal story "Firms Ponder What Constitutes Cash" (7/27/06).... FASB 95 describes cash equivalents as "short-term, highly liquid investments".... Generally, only investments with original maturities of three months or less qualify under that definition."

Why some expect money market funds to now lend their good name to this tainted sector is mystifying. Last week's Asset-Backed Alert newsletter featured a story entitied, "Treasury Engineering Auction-Rate Rescue", which describes a program that "apparently calls for Goldman and Lehman to create an asset-backed commercial paper facility ... that would fund purchases of auction-rate student loan bonds by issues short-term debt secured by those instruments". Normally, this might be a good idea, but getting money funds to purchase anything tainted by headline risk in this environment will be challenging to say the least.

We sympathize for companies grappling with these problems (see Financial Week's "Companies split on taking ARS cash hit"), and we expect investors to recover all of their assets if they can wait it out. But we are baffled by anyone arguing that investors weren't aware of these risks, and are confused by those offering solutions which clearly are unlikely to work.

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