There are bad investments, and then there are really, really bad investments.
In the $330 billion world of auction-rate securities, put bonds backed by education loans in that latter category. Not only are investors stuck with about $80 billion of the unsellable bonds, many of them are now getting paid zero interest for their troubles.
Regulators and issuers are scrambling to find a way out for thousands of investors, but this will typically mean that investors who want to sell will have to do so at a loss.
Late Wednesday, the Missouri Higher Education Loan Authority told investors in some $3 billion of its outstanding auction-rate bonds that it would buy back $30 million or so at a discount, through a secondary trading market set up in February by Restricted Stock Partners. It is the first issuer of student-loan-backed auction rates to step into the secondary market.
"Mohela," as the state's lending authority is known, won't say what that discount will be, but Barry Silbert, the president of New York-based Restricted Stock Partners says other bonds backed by student loans have sold at discounts of 20% to 25% or more.
Ouch! A 25% haircut? That hurts....