FACTBOX: What are auction-rate securities?

NEW YORK (Reuters) - State and federal authorities are cracking down on Wall Street investment banks for their role in the collapse of the $330 billion U.S. auction-rate securities market in February.

Here are some facts about auction-rate securities, which were considered as safe and liquid as cash before the market fell victim to the global credit crunch and investors were left holding bonds they could not sell.

* Auction-rate securities, which were first introduced in 1984, are taxable and tax-exempt long-term bonds with interest rates tied to the short-term market. Interest rates typically reset every seven, 28 or 35 days at an auction.

* The instrument allowed issuers to obtain long-term financing at cheaper short-term rates. About half of the $330 billion auction-rate bonds were sold by U.S. states, cities and public authorities, while the rest were sold by closed-end funds, corporations and student loan agencies.

* Auction-rate securities were marketed as liquid cash alternatives that allowed retail investors, high net worth individuals and corporations to get earn higher rates than on regular cash deposits.

* Few auctions failed until this year when Wall Street dealers, overwhelmed by mounting losses on complex mortgage-related debt that strained their balance sheets, stopped supporting this market. Many auction-rate securities were guaranteed by troubled bond insurers, contributing to the market's collapse.

* Citigroup, UBS, Goldman Sachs, RBC, Morgan Stanley, Lehman Brothers, JPMorgan, Wachovia, Merrill and Bank of America have been leading underwriters of auction-rate securities in the past eight years, according to Thomson Reuters.

* Investors could not sell their securities and many issuers were penalized, when the rates surged above long-term rates. For example, the Port Authority of New York and New Jersey had to pay as much as 20 percent after an auction of its securities failed.

* Many municipal issuers have since restructured this debt into fixed-rate or different types of variable-rate securities to avoid paying high rates. Closed-end funds have also been redeeming these instruments, but a large share of this market is still frozen and in the nascent secondary market investors can only sell these securities at a discount.

(Reporting by Anastasija Johnson; Editing by James Dalgleish)