Variable-Rate Market Now Freezing

Behind the smoke and mirrors, besides the ABX thing, I just saw this.

http://www.reuters.com/article/marketsNews/idUKN2527372820080226?rpc=44

NEW YORK, Feb 25 (Reuters) - Major banks, including UBS AG and Citigroup are making it harder for clients to sell what was considered one of the safest alternatives to cash -- so-called variable-rate demand notes -- sources familiar with industry practices say.

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As a result, the market for variable-rate demand notes has split in two, with credit-worthy paper at times fetching yields that are lower than the approximately 2.5 percent rate that previously prevailed for most of this debt. Less desirable notes now trade at yields of 6 percent and even higher.

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This phenomenon has shocked investors because variable-rate demand notes have safeguards -- letters of credit and standby purchase agreements. Issuers of variable-rate demand notes -- including states, cities and towns -- paid extra fees to give investors those protections, which oblige the sellers of those guarantees to buy the debt back. In contrast, auction-rate notes have none of those safeguards, and billions of dollars of auction-rate notes have failed since late January -- which means issuers have had to pay penalty rates as high as 20 percent. Such auctions fail when there are not enough buyers.