If it’s the former, and you assume that issuers will continue to pay as they have (maybe you have some better information that the rest of the market), there might be some opportunity to arb the product – to purchase ARS at attractive risk-adjusted rates.

The question then becomes – How do you determine which auctions failed because the market is tough right now and buyers are scared and therefore scarce, versus, those that failed because the underlying asset to which the securities are tied really do not have value so buyers are rightly not interested?

So it becomes a question of solvency. As a potential buyer of these assets, if I believe that the underlying issuer is a insolvent, I am likely not willing to buy it, whatever the rate.

If I’m a corporate holder of ARS, I could switch them from my short-term holdings to my long-term holdings (as many companies have done), but then again, at the higher reset rates, many of the issuers are unable to pay, and the corporations holding them experience diminished cash flows as a result of default on the part of the issuer.