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 FINANCIAL CRISIS INQUIRY COMMISSION REPORT

dealer stepped up or the borrower paid off the loan. ARS investors were typically
very risk averse and valued liquidity, and so they were willing to pay a premium for
guarantees on the ARS investments from monolines. It necessarily followed that the
monolines’ growing problems in the latter half of  affected the ARS market.
Fearing that the monolines would not be able to perform on their guarantees, in-
vestors fled. The dealers’ interventions were all that kept the market going, but the
stress became too great. With their own problems to contend with, the dealers were
unable to step in and ensure successful auctions. In February, en masse, they pulled
up stakes. The market collapsed almost instantaneously. On February , in one of
the starkest market dislocations of the financial crisis,  of the ARS auctions failed;
the following week,  failed.
Hundreds of billions of dollars were trapped by ARS instruments as investors
were obligated to retain their investments. And retail investors—individuals invest-
ing less than  million, small businesses, and charities—constituted more than
 billion of this  billion market.  Moreover, investors who chose to re-
main in the market demanded a premium to take on the risk. Between investor de-
mands and interest rate resets, countless governments, infrastructure projects, and
nonprofits on tight budgets were slammed with interest rates of  or higher.
Problems in the ARS market cost Georgetown University, a borrower,  million. 
New York State was stuck with interest rates that soared from about . to more
than  on  billion of its debt. The Port Authority of New York and New Jersey
saw the interest rate on its debt jump from . to  in a single week in Febru-
ary. 
In  alone, the SEC received more than , investor complaints regarding
the failed ARS auctions. Investors argued that brokers had led them to believe that
ARS were safe and liquid, essentially the equivalent of money market accounts but
with the potential for a slightly higher interest rate. Investors also reported that the
frozen market blocked their access to money for short-term needs such as medical
expenses, college tuition, and, for some small businesses and charities, payroll. By
, the SEC had settled with financial institutions including Bank of America, RBC
Capital Markets, and Deutsche Bank to resolve charges that the firms misled in-
vestors. As a result, these and other banks made more than  billion available to
pay off tens of thousands of ARS investors. 