Wachovia to buy back about $9 billion of auction-rate securities

Wachovia to buy back auction-rate securities

Bank reaches agreement with regulators to repurchase about $9 billion

By John Spence, MarketWatch

Last Update: 8/15/2008 12:45:00 PM

BOSTON (MarketWatch) — State and federal regulators said Friday that Wachovia
Corp. has agreed to a preliminary settlement related to the sale of roughly $9
billion in auction-rate securities, the market for which collapsed earlier this
year.

Charlotte, N.C.-based Wachovia (WB) is the latest high-profile bank to agree to
repurchase auction-rate securities hit by the credit crunch.

Under the settlement, Wachovia will offer to buy roughly $5.7 billion of
auction-rate securities held by individual investors, small businesses and
charitable organizations, the Securities and Exchange Commission said.

The bank will also offer to purchase about $3.1 billion of securities held by all
other Wachovia investors, according to an SEC news release.

The settlement includes investors who bought the securities through Wachovia
Securities LLC and Wachovia Capital Markets LLC.

The SEC said the proposed charges are a result of “alleged misrepresentations
made by Wachovia to thousands of its customers about the liquidity risk”
associated with auction-rate securities. The agency said Wachovia marketed the
securities as “cash alternatives.”

“We continue to work with state regulators and others to bring real relief to
investors who were not given the forthright information they needed in the
process of purchasing auction-rate securities,” said Linda Chatman Thomsen, head
of the SEC’s enforcement division. “This agreement in principle with Wachovia, if
approved by the Commission, will permit tens of thousands of Wachovia investors
to get their money back.”

The SEC said the settlement was reached with the help of Missouri’s secretary of
state, the North American Securities Administrators Association, New York’s
attorney general and the Financial Industry Regulatory Authority. The regulator’s
investigation into the auction-rate securities is ongoing.

“We understand that unprecedented market conditions have created difficulties for
our clients, particularly those holding auction-rate securities,” said Robert
Steel, Wachovia’s chief executive, in a statement. “We are pleased to announce a
comprehensive solution for the liquidity needs of clients who purchased
auction-rate securities at Wachovia and to resolve this matter with federal and
state regulators.”

Wachovia neither admitted nor denied allegations of wrongdoing.

“Today’s settlement is a major step towards making these investors whole,” said
Missouri Secretary of State Robin Carnahan on Friday. “I am pleased that six
months of uncertainty and worry is over and that these investors will soon get
their money back.”

New York Attorney General Andrew Cuomo on Friday said Wachovia would pay civil
penalties of $50 million.

The Wachovia news comes after Cuomo recently reached similar agreements with J.P.
Morgan (JPM), Morgan Stanley (MS), Citigroup (C) and UBS (UBS).

“The five settlements together provide relief to thousands of investors who were
left holding nearly $35 billion worth of securities they could not sell after the
widespread failure of the auction-rate-securities market this past February,”
Cuomo’s office said in a statement.

“At the heart of this investigation is the simple goal of returning billions of
dollars back into the hands of investors, which in turn injects confidence into
the entire market,” the New York attorney general said. “The industry is now
taking responsibility for correcting a problem they helped create, and we’ll
continue working to make all investors whole.”

Shares of Wachovia traded lower by about 1% in midday trades Friday after the
settlement announcement.

Wachovia said it will offer loans to affected clients in need of liquidity until
the auction-rate securities repurchases occur.

The bank has already recorded a $500 million pre-tax increase to legal reserves,
including amounts reserved for estimated market valuation losses on affected
auction-rate securities for the second quarter.

Based on the settlement, Wachovia now expects to record a further $275 million
pre-tax increase to legal reserves in the third quarter of 2008.

Wachovia estimated that the par value of auction-rate securities currently
outstanding and eligible for purchase under the offers totals about $8.5 billion.

Separately, Merrill Lynch (MER) faces an “imminent” lawsuit from Cuomo if the
brokerage doesn’t agree to a satisfactory settlement over auction-rate
securities, according to media reports Friday.

“We have not been able to reach satisfactory terms” with Merrill Lynch, Cuomo
said in a conference call, as reported by Bloomberg. Merrill Lynch will receive a
letter from Cuomo’s office outlining his intention to pursue legal action today,
according to reports.

Auction-rate securities settlements

Source: New York Attorney General Andrew Cuomo’s office

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