July 18 (Bloomberg) -- The surprising thing about the collapse of the auction-rate securities market is how well states and municipalities are taking it.

Since dealers stopped supporting the $330 billion market back in February, issuers of auction-rate securities have spent more than $1 billion on fees and higher interest rates, and they haven't made a peep about the guys responsible for this misery.

No, I don't mean the maniacs who concocted all the subprime securities that are threatening the entire financial system, or the rating companies that so compliantly slapped their AAA on the things, or even the bond insurers who binged on them.

I refer to the dealers and underwriters. If anything, they are being rewarded for wrecking the market.

Issuers paid them to set up the auctions and sell their bonds, gave them money to run the auctions, and compensated them for the interest-rate swaps that became the must-have accessory to auction securities. They paid them to keep running auctions that failed, and now, more often than not, they are paying the same firms to sell new bonds to refinance their now-dead auction- rate debt and to undo the swaps.

Perhaps some cross words have passed between issuer and underwriter, but I doubt it.

It's still pretty early in the process, of course -- it looks like issuers have refinanced their way out of about $90 billion of the once $166 billion municipal piece of the auction- rate market, or they intend to do so.

Sweet Reason

And a bunch of states made inquiries into why their pals at the securities firms decided to blow up the market. But that's as far as it has gone. The state of Massachusetts filed a complaint against UBS AG on June 26 for the Zurich-based bank's role in the debacle, but that lawsuit is all about investors, not the taxpayers who are footing the bill.

Can it be that public officials everywhere appreciated exactly what they were getting into when they first sold auction- rate debt? You mean, they all realized that dealers could bid on their securities, but had no obligation to bid? Really?

Sweet reason doesn't usually enter into the relations that states and municipalities enjoy with the securities industry. Remember how angry Orange County, California, was after it declared bankruptcy back in 1994? The county sued the dealers that enabled treasurer and tax collector Robert Citron to perpetuate his fantasy of financial mastery.

Insurer Lawsuit

Merrill Lynch & Co., Citron's top broker, wound up paying $400 million to Orange County, which sued it for providing bad financial advice.

So far, the hundreds of municipalities that made up the auction-rate securities market have been silent. Perhaps we live in a more gracious and understanding age.

On July 8, an issuer that was forced to pay one of those well-documented 20 percent penalty interest rates after its failed auctions filed a lawsuit -- against an insurer.

The lawsuit filed by a New England Patriots football team affiliate is against Ambac Assurance Corp. Ambac insured the auction-rate debt sold in 2006 by the Patriots for their new stadium. After the auction market froze in February and the penalty rate kicked in, the team refinanced. Ambac then presented it with a bill for $2,765,073, representing a portion of the annual premiums the insurer would have collected through 2017.

Where's the Outrage?

The lawsuit basically says ``What? Are you kidding me?'' about the insurer's claim for future premiums, and explains: ``Due to Ambac's weakening credit position and market uncertainty as to how much subprime exposure it had in its portfolio, on February 20, 2008, the risk associated with the 2006 Bonds was so high, that there were no buyers for the bonds, and the auction failed.''

What the complaint doesn't mention is that most dealers stopped supporting auctions a week earlier, and that their presence in this market was crucial. Just how crucial was spelled out in the June 26 complaint against UBS filed by Massachusetts Secretary of State William Galvin.

Between 2006 and Feb. 28, 2008, UBS submitted support bids in 30,367 auctions for municipal and student-loan securities, the complaint said, and the bids were drawn upon 86 percent of the time. The ``market'' was a fiction. The only reason it failed so catastrophically was because dealers got tired of buying more and more auction-rate paper.

Most taxpayers haven't seen the bill being exacted by this auction-rate mess yet. When they do, we might see more outrage.

(Joe Mysak is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: Joe Mysak in New York at jmysakjr@bloomberg.net

Last Updated: July 18, 2008 00:01 EDT