Auction Rate Securities
Nuveen came under criticism during 2008 for its involvement in the auction rate securities auction failures, during which investors' assets of $15 Billion became illiquid. They operated closed-end funds that sell two share classes in order to acquire capital for investment: auction-rate preferred shares that hold first claim on the underlying assets (and pay income at rates set in weekly auctions), and common shares that typically pay higher income in exchange for greater risk of loss of principal.
The source of troubles for Nuveen and its investors was the collapse of the market for auction rate securities in February 2008, when broker-dealers such as UBS declined to continue to participate in dutch auctions that determined the rate of interest for the securities. Common shareholders were hurt, due to a decline in net interest income and the increased discounting of their shares in the market following fears that Nuveen would be unable to refinance or reauction the preferred shares at lower interest rates. While common shareholders suffered worse than preferred shareholders in terms of principal losses, they were able to sell their shares on the NYSE while preferred shareholders had no market in which to sell.
On September 19, 2008, Nuveen Executive VP William Adams IV was asked to testify in front of the House Finance Committee, where he stated that "One hundred of our closed-end funds had more than $15 billion of auction rate preferred shares - or ARPS - at the time this market failed in February." Adams said that Nuveen had come up with a new financial instrument called Variable Rate Demand Preferred, or VRDP. He urged that further approval of this new type of stock would allow Nuveen to pay back investors who had lost access to their money invested in Nuveen's preferred shares.
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