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Russell Paquette liked auction-rate securities (ARS) as much as the next treasurer. At Recreational Equipment Inc. (REI) in Kent, Wash., he had been particularly attracted to those backed by student loans. “They were AAA-rated, over-collateralized by 30% and roughly 97% guaranteed by the Department of Education,” the REI treasurer points out. But when asset-backed investments began to lose their auction market liquidity, an alert Paquette bailed out of ARS investments. “We exited that market in December and January,” he notes. “We were fortunate.”

A neighbor down the road in Redmond, Wash., also invested in the ARS market and escaped intact. In 2006, when the SEC ruled that auction-rate paper no longer qualified as a cash equivalent, Microsoft Corp.’s treasury saw an opportunity in the market dislocation that followed and decided to buy. “At a time when others were selling, we went overweight in auction-rate securities, relative to our benchmarks,” reports Microsoft treasurer George Zinn. It was a big bet. “We went overweight by billions of dollars,” he explains. “That allowed us to reap considerable value and outperform our benchmarks by taking advantage of the dislocation. We bought auction-rate for all our portfolios where it was permitted, including our liquidity portfolio.”

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