Sunday Musings: Covering your ARS

Two of the heavyweights in investment banking, Citigroup and Merrill Lynch, have been taken out to the barn and spanked because of improper sale of their ARS (Auction Rate Securities).

Bloomberg reports as follows:

Citigroup Inc., the largest U.S. bank by assets, agreed to buy back or help clients unload as much as $19.5 billion in auction-rate securities and pay a $100 million fine to settle U.S. regulatory claims it improperly saddled customers with untradeable bonds.

Citigroup will buy back about $7.5 billion in securities from individual customers, charities and small businesses under a settlement with New York State Attorney General Andrew Cuomo, the Securities and Exchange Commission and a group of states, led by Texas, the SEC said in a statement today. It must also start “restoring liquidity” to more than 2,600 institutions holding about $12 billion of the instruments, the SEC said.

Citigroup is the first Wall Street firm to settle federal claims amid a probe into how banks sold auction-rate securities before the $330 billion market collapsed in February. The accord may set a precedent for negotiations with firms including UBS AG, which has been named in civil complaints by Cuomo and authorities in Massachusetts.

Citigroup agreed to buy back illiquid securities from about 40,000 customers by Nov. 5 and compensate clients who already sold their holdings at a loss, according to Cuomo.

The accord also requires that the New York-based bank make “best efforts” to help 2,600 institutions by the end of 2009, the SEC said. Cuomo reserved the right to take legal action, and the SEC may seek a fine, if the bank doesn’t do enough for those investors.

“We want to see what this situation does for the marketplace in general and then what kind of progress Citigroup is making,” Cuomo told journalists today.

Citigroup also agreed to reimburse refinancing fees to certain municipal borrowers that issued auction-rate securities through Citigroup after Aug. 1, 2007, according to a statement released by the bank.

Citigroup neither admitted nor denied allegations of wrongdoing.

“We are committed to continuing the many initiatives that we believe will provide liquidity to our auction-rate clients,” said Arthur Tildesley, chief administrative officer for Citigroup’s wealth-management division.

Citigroup estimated that securities eligible for the buyback have a face value of $7.3 billion and may be worth about $500 million less on the market than their purchase price. Under accounting rules, Citigroup may have to record a pre-tax loss to reflect the difference. The actual loss “will depend on the market value at that time and the amount of securities purchased,” the bank said in the statement.

Auction-rate securities are bonds or preferred shares whose interest rates are reset by periodic bidding run by dealers. Firms including Citigroup abandoned their routine role as buyers of last resort for the debt in mid-February as demand dried up, allowing the market to collapse and leaving investors stuck in what had been pitched to them as money-market-like instruments.

Yahoo had this update:

Citigroup (C.N) and Merrill Lynch (MER.N) said they would buy back billions of dollars of illiquid auction-rate securities from retail clients, and Citigroup agreed to pay a $100 million fine to settle charges it fraudulently misled investors about the debt’s risk.

Regulators said Citigroup would buy back auction-rate debt from about 40,000 retail customers, charities and small or mid-sized businesses by November 5. Citigroup agreed to fully reimburse retail investors who sold the debt at a loss.

The SEC said the bank would also use its “best efforts” to liquidate, by the end of 2009, an additional $12 billion of the debt held by more than 2,600 institutional investors.

New York and the North American Securities Administrators Association will split Citigroup’s $100 million fine.

Cuomo had accused Citigroup of wrongly telling customers the debt was safe, liquid and the equivalent of cash.

“This is not just a Wall Street issue, this is a Main Street issue,” Cuomo said at a news conference.

He said Thursday’s settlement “will help restore confidence in this market,” and added, “It does justice for consumers.”

Merrill said its buyback covers more than 30,000 clients.

“Our clients have been caught in an unprecedented liquidity crisis,” Chief Executive John Thain said. “We are solving it by giving them the option of selling their positions to us.”

Both companies got caught with their hands in a cookie jar and are offering to make good. Somehow Wall Street firms always seem to have the ability, when caught in the act of shafting, to simply get away by neither admitting nor denying allegations of wrongdoing, paying a pittance of a fine, after which all is forgotten and it’s business as usual.

While in this case there maybe more financial fallout because of the forced buyback offer, I have always wondered why these companies are held to a different standard than the rest of us?

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
This entry was posted in Uncategorized. Bookmark the permalink.

Comments are closed.