Citigroup, Merrill to buy back auction-rate debt

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debt from about 40,000 retail customers, charities and small or mid-sized businesses by Nov. 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."

Massachusetts' top securities regulator, William Galvin, plans to continue pursuing his lawsuit accusing Merrill of fraud in marketing the debt, a spokesman said.

Cuomo said he would review Merrill's plan.

New York and Massachusetts also have accused UBS of fraud in marketing the debt. UBS spokeswoman Karina Byrne said the Swiss bank was working with regulators toward "a comprehensive solution" for investors in auction-rate debt.

Citigroup and Merrill said their buyback offers would not materially affect capital. Citigroup said it has liquidated more than half its retail clients' auction-rate holdings, while Merrill said it has liquidated more than 40 per cent.

The settlement by Citigroup follows costly and embarrassing scandals the bank faced earlier this decade, including inflated stock research, its Japanese private bank, a rogue bond trade in Europe, and the collapses of Enron Corp and WorldCom Inc.

In Thursday trading on the New York Stock Exchange, Citigroup shares closed down $1.23 at $18.47, while Merrill fell $2.40, or 8.4 per cent, to $26.10.

JUST ONE MORE PROBLEM

Citigroup has incurred more than $58 billion of write-downs and credit losses since mid-2007 as the housing market deteriorated and capital markets seized up, causing losses on subprime mortgages and other risky debt.

"It's just one more product that's blown up in the face of the investment banks," said William Smith, president of Smith Asset Management Inc in New York. "The problem is they've got to take all these billions of dollars on the balance sheet."