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GREENSBORO - On a recent Sunday, Andrew Chamberlin stood in front of the membership at First Lutheran Church and told the congregation that $500,000 of the church's money was frozen in the latest financial market crisis.

First Lutheran had planned to break ground this fall on a $3.5 million building project backed by the cash and loans.

The money, given in donations ranging from a few crumpled dollars to checks for $50,000, is trapped in the auction rate securities market, which is under investigation by attorneys general and securities departments in nearly a dozen states.

"The looks on their faces was enough to break your heart," said Chamberlin, a lawyer and council president for the 1,000-member church, whose ministry emphasizes ending hunger and homelessness in Guilford County, disaster response and a litany of other causes.

"It has really undermined the momentum we had," said Duane Dassow, who attended First Lutheran, at 3600 W. Friendly Ave., as a child. He and his wife, Madeline, later raised two children there. "It's brought a temporary halt to the project."

Unlike the subprime mortgage collapse that has dominated financial news for the past year, the fallout from the lesser-known $360 billion auction rate securities market has wreaked havoc well below the public radar.

First Lutheran is far from alone; investors small and large have put money into what technically are long-term securities but are routinely used to park cash for short periods.

Auction rate securities have traditionally been considered to be safe, sound investments. That trouble has infected this obscure market is a testament, in some respects, to how deep the nation's financial problems have grown.

North Carolina is one of those states looking into the auction rate securities market.

"The 'auction' really is an intricate and unnatural system of rules and regulations," said David Massey, North Carolina's deputy securities administrator.

Massey could not speak directly about the half-dozen complaints his office is investigating, including one filed by First Lutheran.

Auction rate securities are bonds with long maturity dates that were popular with investors who wanted to take very little risk but get better short- term interest rates than simply depositing cash at banks.

Under the auction system, run largely by large Wall Street investment houses and banks, these bonds are bought and sold at interest rates that periodically reset, sometimes weekly.

Investors could also easily cash them in and take their money elsewhere.

Because the interest rates were agreed upon by buyers and sellers, the interest payments for borrowers also wouldn't be as high as with more traditional arrangements. The system could only fail, according to observers, if the auctions didn't attract enough buyers.

For a long time there was a stability in that market, said J.C. Curry, chief investigator in the North Carolina securities agency. But that's exactly what started happening last year, according to published news reports and observers.

Buyers stopped buying. Securities investigators are looking into charges that investment houses and banks continued to buy up the securities to keep the system operating smoothly, hoping other buyers would return. But as buyers failed to materialize, and as banks realized they needed to dump investments off their balance sheets, the auction markets began failing.

Investors such as First Lutheran could find no one to buy their bonds at any rate. What investors were told were short-term investments became long-term assets that could not be withdrawn.

Now people who still have money tied up in the system - such as First Lutheran, which just needed to stash it until the church was ready to start building - are having a hard time accessing any of it.

"The big issue is what were the investors who bought into these auctions told, and what's happening now," Massey said. "We are particularly interested in the pain of the smaller investors, as opposed to institutional investors with lots of money; the mom-and-pops, who were sold these investment as the functional equivalence of a money market account."

First Lutheran purchased its securities through UBS Financial Services in Greensboro, which is part of a diversified global financial services company.

"We know that we are a small player in the overall scheme of things," said church member Tommie Arnold, who has worked in the banking industry. "Our money means a lot to our church, but in the overall portfolio of UBS, it's small potatoes. We just feel like we are at their mercy."

UBS is where the church had long done all of its banking and had placed money through its broker into auction-rate securities in 2004.

Last year, as the church's capital campaign grew, that money went there as well.

UBS, Merrill Lynch and Bank of America are among the companies that have been subpoenaed by securities investigators.

"Instead of disclosing the true nature of ARS and the substantial liquidity risks associated with them," alleged one class action complaint filed against UBS in New York in March, "defendants continued to push as many ARS as possible onto its customers in order to unload the inventory off its already troubled balance sheet."

Especially troubling to First Lutheran are UBS e-mails attached to a lawsuit filed by Massachusetts. Those e-mails urged employees to steer customers to the securities while at least one high-ranking employee leading the charge was getting rid of his own.

Between May and December, Chamberlin said, all of First Lutheran's $500,000 ended up in those securities.

"UBS leadership already knew this was a bad market and that's the real rub, that they encouraged us to invest when they already knew it wasn't going to yield what they were promising," church member Lelia Moore said.

Gary Leibel, executive director of the UBS office in Greensboro, and Marten Hoekstra, president of the U.S. operations, could not be reached for comment regarding First Lutheran's situation.

A spokesman in the company's New York office said officials couldn't comment on individual clients.

"UBS is committed to addressing our clients' concerns," said UBS company spokesman Kris Kagel. Back in 2007, investors, state attorneys general and securities officials allege, investment companies running the auctions began propping up the market by buying up what didn't sell.

According to these complaints, brokers made money both in underwriting the securities and managing the auction process.

"The companies would then take the ones they'd buy, place them in inventory, and sell them to people like us," said Janice Eberenz, church administrator at First Lutheran.

"Our understanding was whenever we needed to get hold of this money," Eberenz said, "I just needed to contact them."

But by this past February, the companies, because of tightened credit markets, could no longer keep the auctions going and pulled out, according to the North American Securities Administrators Association.

That left investors such as First Lutheran, which plans to replace an aging building and add classrooms to its school, holding bonds that are considered safe but won't mature for 30 years or more.

"It's like having a beautiful, million-dollar house in a floodplain," Eberenz said. "It's still beautiful, the craftsmanship is fabulous, but nobody's going to buy it."

Some of the issuers, including Eaton Vance and John Hancock, have bought investors out of their frozen holdings, according to the Wall Street Journal. But UBS has not.

"You add insult to injury because a lot of brokerage firms are now offering to loan them their own money - with interest," said Curry, the investigator in the North Carolina securities office. First Lutheran received loan paperwork.

The documents spell out, however, that the loan can be recalled, in full, at any time, and the church could be required to provide additional collateral.

"The fact that other brokerage houses are making it right leaves us to hope that increasing public pressure, perhaps from Congress and others, will force UBS to do the right thing, even if they have to be forced into doing so," Chamberlin said.

Contact Nancy H. McLaughlin at 373-7049 or nancy.mclaughlin@news-record.com