Citigroup, Merrill to buy back auction-rate debt

Font Size

Print

Feedback

Email

Discuss

Related Articles

Eli Lilly to buy ImClone for $6.5 bnHeinz bids for Australia's Golden CircleBNP clinches Fortis' Belgian bank armNokia Siemens wins Bangladesh network deal

Citigroup and Merrill Lynch 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.

The announcements could pave the way for settlements or buybacks by UBS AG and other financial companies whose clients own such debt, following the February meltdown of the $330 billion auction-rate market.

Citigroup agreed to buy back about $7.5 billion of the debt, as part of settlements with New York Attorney General Andrew Cuomo and the US Securities and Exchange Commission.

Meanwhile, after US markets closed, Merrill offered for a one-year period beginning Jan. 15, 2009 to buy back auction-rate debt it sold to retail clients. It estimated that its clients hold $12 billion of the debt.

Both companies offered to buy back the debt at face value.

For Citigroup, which said it may face a $500 million pre-tax loss, Thursday's settlement will hinder efforts by Chief Executive Vikram Pandit to cut costs and restore profitability following $17.4 billion of losses in the last three quarters.

"It's really a face-saving attempt," said Brian Yelvington, an analyst at CreditSights Inc in New York, referring to Citigroup. "Other banks that have sponsored these programs could be under pressure to do something similar."

Merrill's buyback offer, meanwhile, comes after a year when the bank and brokerage suffered $19.2 billion of losses.

Denise Voigt Crawford, the Texas securities commissioner, late on Thursday said state regulators are examining auction-rate practices of 11 banks and brokerages in addition to Citigroup, and that she expects more settlements soon.

Richard Blumenthal, Connecticut's attorney general, in an interview said he hoped the Citigroup settlement "sends a very compelling message that others should follow Citigroup's example and do the right thing."

Auction-rate debt has interest rates that reset through periodic auctions, typically held every seven, 28 or 35 days.

Once thought safe, much of the market has been frozen since Wall Street brokerages stopped supporting the debt. This led to higher borrowing costs for state and local governments, hurting taxpayers.

Late on Thursday, Bank of America Corp, the largest US retail bank, said it received subpoenas from federal and state regulators over auction-rate debt.

Meanwhile, STMicroelectronics NV this week sued Credit Suisse Group AG, saying the bank invested $450 million of the chipmaker's cash in auction-rate debt without permission. A Credit Suisse spokesman declined to comment.

DOING CONSUMERS JUSTICE