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More Than Just Banks Now Feeling Subprime Pain

Mary Thompson,|CNBC Reporter
Monday, 4 Feb 2008 | 3:33 PM ET

Financials have taken a big hit related to subprime problems, but now it's looking like no firm is safe — the mortgage mess is now having an impact on a number of other sectors.

They're not taking multi-billion-dollar charges like the financial firms, but plenty of companies in industries ranging from pharma to tech are getting pinched by subprime. And they're getting pinched where they'd least expect it — in their cash accounts.

These firms bought auction-rate securities — bonds created from pools of long-term debt. They don't pay a fixed rate, rather a lower, rolling rate that's reset through a Dutch auction every 28 to 35 days.

A lot of companies buy these securites to juice up the yields in their cash accounts. The debt is highly rated, pays higher rates than Treasurys or CDs and until now, were considered very safe.

But that changed last summer when investors started worrying about some of the debt and derivatives held in these securities according to Lee Epstein, CEO of Money Market One, a boutique broker-dealer for corporate cash accounts.

"These pools of debt held collateralized mortgage obligations which held subprime mortgages," Epstein said. "When subprimes became less attractive these companies fled this market because they no longer wanted to hold this kind of debt."

So companies who wanted to sell this debt at the auctions couldn't find buyers. Usually a broker steps in to buy it. This assures there's always demand and is one reason auction rate securities are considered "safe."

But Epstein says at private auctions handled by a single broker, the broker decided they didn't want to buy the stuff either. The result: more than 60 of these auctions failed and that means the holder of the debt had to write down its value.

In the last two quarters, firms ranging from Bristol-Myers Squibb and US Airways to 3M and ADC Telecommunications have taken writedowns ranging from $8 million to $275 million.

These amounts may not be material to their results, but they do exemplify just how far and wide the subprime problem reaches.

And it's not just fears about subprime hitting this $360 billion market. A lot of these securities hold debt backed by the muni bond insurers and their value's been questioned now as well.

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