3rd UPDATE: Three Banks Agree To Buy Back Billions Of ARS

Last Update: 8/21/2008 8:18:38 PM

(Updates with SEC comment on settlement with Merrill Lynch in the works in
paragraphs 13 and 14, Goldman Sachs statement in paragraph 17, and Bank of
America declining to comment in paragraph 23.)

By Chad Bray
Of DOW JONES NEWSWIRES

NEW YORK (Dow Jones)–Merrill Lynch & Co. (MER), Deutsche Bank AG (DB) and
Goldman Sachs Group (GS) agreed Thursday to buy back more than $12 billion in
auction-rate securities as part of agreements with state regulators probing how
the firms marketed the complex securities.

During a conference call Thursday, New York Attorney General Andrew Cuomo said
Merrill Lynch will pay a civil penalty of $125 million, while Goldman Sachs will
pay a penalty of $22.5 million and Deutsche Bank will pay a $15 million penalty
as part of the agreements.

The settlements were reached with New York and other members of the North
American Securities Administrators Association, whose members are state
securities regulators. The penalties will be split among the states.

Merrill Lynch will begin buying back auction-rate securities it sold to retail
clients, charities and small businesses with $4 million or less in assets
beginning Oct. 1, Cuomo said. The firm will complete its buybacks by Jan. 2, he
said.

Cuomo, who reached the agreement after meeting with Merrill Lynch Chief Executive
John Thain on Thursday afternoon, said Merrill Lynch will buy back between $10
billion and $12 billion in auction-rate holdings.

The attorney general had threatened to sue Merrill Lynch on Friday if an
agreement wasn’t reached by the end of the day.

Merrill Lynch said it would voluntarily offer to buy back auction-rate holdings
from its retail clients at par between Jan. 15, 2009, and Jan. 15, 2010. However,
regulators, including Cuomo, said they were concerned about the timing of the
buybacks.

In a statement, Thain said the firm reached an “amicable resolution and global
settlement” after he met personally with Cuomo and Karen Tyler, president of the
North American Securities Administrators Association.

“We will accelerate the plans we first announced two weeks ago for purchasing
auction-rate securities,” Thain said. “We are pleased our clients have the
certainty of a favorable resolution to this unprecedented liquidity crisis.”

Clients will retain the right to sell their ARS to Merrill Lynch through Jan. 15,
2010, Thain said.

Earlier Thursday, Massachusetts Secretary of State William Galvin announced the
state had reached its own separate settlement in principle with Merrill Lynch, in
which the firm would buy back illiquid auction-rate securities at par from retail
clients who have less than $3 million on deposit beginning Oct. 15.

Under that settlement, Merrill Lynch would buy back at par all illiquid
securities from its retail customers with deposits of $100 million or less on or
after Jan. 15.

A settlement between Merrill Lynch and federal regulators is in the works as
well, according to a statement issued Thursday.

“As a result of our work on this investigation over the last several months, the
(Securities and Exchange Commission) expects to make an announcement very shortly
on the terms of a proposed settlement with Merrill Lynch,” said Linda Thomsen,
the SEC’s enforcement director. She said the SEC is working closely with state
regulators and the Financial Industry Regulatory Authority and that its
auction-rate securities probe includes “both potential corporate and individual
violations of the federal securities laws, and is continuing.” Any settlement
recommendation by the SEC staff would require approval by the commission itself.

Meanwhile, Goldman Sachs will buy back about $1.5 billion in auction-rate
securities from its retail clients by Nov. 12, while Deutsche Bank will buy back
about $1 billion in auction-rate holdings from its retail clients within 90 days,
Cuomo said.

“We’re pleased to resolve this matter,” said Ted Meyer, a Deutsche Bank
spokesman, in a statement.

In a statement late Thursday, Goldman said it intends to cooperate with the SEC’s
ongoing investigation.

Buybacks will be at par, meaning the banks will offer to buy back the securities
at the price the investor paid.

Auction-rate securities are debt instruments whose interest rates are reset
periodically at daily, weekly or monthly auctions. Several auctions failed in
February, driving up interest rates for auction-rate securities issuers, while
leaving investors locked into investments that had been promoted as safe and
liquid.

In recent weeks, regulators have reached settlements with Citigroup Inc. (C), UBS
AG (UBS), JPMorgan Chase & Co. (JPM), Morgan Stanley (MS) and Wachovia Corp. (WB)
to buy back more than $40 billion worth of the securities.

Cuomo said his probe is ongoing and his office is investigating individuals at
banks about their actions in marketing the securities. The settlements announced
so far don’t preclude his office or other regulators from taking actions against
individuals, Cuomo said.

The attorney general said his office is investigating a number of banks and hopes
to reach similar resolutions with them. Cuomo said his office is looking at about
25 firms.

On Wednesday, Cuomo’s office indicated it was stepping up its auction-rate probe
of Bank of America Corp. (BAC), Goldman and Deutsche Bank. A Bank of America
spokeswoman declined to comment.

In a letter to the Regional Bond Dealers Association on Wednesday, Cuomo’s office
also raised doubts about protests from some brokers who claim they were duped by
investment banks who ran the auctions and shouldn’t be forced to buy back
securities sold to their clients.

“If downstream brokerages deliberately stuck their heads in the sand, but
continued to actively market these products to unknowing investors, that will
certainly be relevant to our calculus of the firms’ culpability,” Cuomo said in
the letter.

In his letter, Cuomo said the attorney general’s office has subpoenaed and
continues to probe a number of firms that sold auction-rate securities, including
Fidelity Investments, Charles Schwab Corp. (SCHW), TD Ameritrade Inc. (AMTD),
E*Trade Financial Corp. (ETFC) and Oppenheimer & Co.

Did you like this? If so, please bookmark it,

$\\$

about it, and subscribe to the blog RSS feed.

Possibly Related Posts: