ARS are debt instruments that paid interest rates that reflect the clearing prices of regular auctions. Oppenheimer sold several series of the Camber, Capstan, and Pivot ARS to US Airways. The Camber, Capstan, and Pivot are among the most complex types of ARS, as they are backed by synthetic CDOs. The auctions of these ARS were among the first to fail in the summer of 2007, while most of the ARS market failed in February of 2008. SLCG has written an extensive paper on ARS and the factors that led to the auction failures.
The investors in the Camber, Capstan, and Pivot ARS were ultimately exposed to the credit risk of a list of corporate bonds issued by a group of reference entities. Credit-related losses in the portfolio of reference entities translate into reductions in the ARS investors' principal. Even if the ARS auctions would have cleared, ARS investors could still suffer capital losses since they were the ultimate providers of credit default protection to the originator.
In summary, these securities paid a low return for the high-risk imbedded in the tranching of the portfolio of selected reference entities. Not only were these securities unsuitable for US Airways but they should not have been sold at all.
