3 of 24ARS auction, bid orders are accepted starting with the lowest interest rate bid until all securitiesavailable for sale are matched with purchase orders. The rate at which the final sell order isfilled is known as the “clearing rate.” The clearing rate applies to the entire issue of ARS,including all other buy orders, and to the securities of existing holders who chose to hold ratherthan sell their securities in the auction. This type of auction process is referred to as a “Dutchauction.”5.
ARS auctions are generally held every 7, 28, or 35 days. Orders to purchase orsell ARS at auctions can be placed only through designated broker-dealers that manage theauctions of the ARS. These broker-dealers (in this case, Goldman) collect “buy” and “sell”orders and then forward them to the designated auction agent that administers the Dutch auction.6.
If the bids received by the auction agent are insufficient to purchase all the ARSoffered for sale at a particular auction, the auction “fails.” As a result, until the next successfulauction, the ARS holders are unable to sell the securities that they hold (unless they can do so ina secondary market) and the interest rate on all ARS in the issuance jumps to a contractual“maximum” rate.7.
Based on the reports of several financial media outlets and state and federalregulators, by February 2008, the ARS market had grown to approximately $330 billion inoutstanding securities. Approximately half of this market (~$160 billion) was issued bymunicipal issuers like Reno.8.
Goldman promoted the ARS structure to municipal issuers like Reno as a meansto borrow money long-term for capital projects at short-term interest rates. Goldman alsopromoted ARS to investors interested in short-term investments (for example, to manage cashbalances) as a money-market substitute that generally offered a slightly higher interest rate than a