Lessons from MARS! Were Municipal Auction Rate Securities a Financial Innovation? Conflict of Interest, Lack of Transparency, and Agency Costs in the MARS Market

Charles W. Cole

Municipal Finance Journal, 2010, vol. 31, issue 2, 77 - 97

Abstract: By examining the notion that municipal auction rate securities (MARS) were a financial innovation, this paper proposes to develop lessons that can be used by issuers, financial agents, regulators, and other market participants to better assess perceived valuable market structures and security designs. Such understanding and awareness will result in better allocation of financial resources as well as reduced financial risk and cost. Additionally, conflict of interest concerns in the MARS market, lack of market transparency, and associated agency costs are studied with the intent of offering insight to issuers and their advisors regarding the potential cost of such conflicts and how to avoid them. This study finds that MARS does not appear to be a financial innovation and that conflict of interest and transparency issues, if fully explored and understood, may help market participants more fully evaluate the real value of capital market financing vehicles such as MARS.

Date: 2010
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