Citigroup Inc. and UBS AG on Thursday December 11 agreed to buy back a total of nearly $30 billion in risky auction-rate securities regulators disclosed. The securities were originally marketed to the banks’ customers as safe investments. The Securities and Exchange Commission has approved the agreement.
Tens of thousands of the banks’ customers bought the auction-rate
securities before the $330 billion market for them froze in
mid-February, according to SEC officials. The new settlements were the largest return of customer money in the agency’s history and all the investors will be made whole, SEC Chairman Christopher Cox said in a statement.
Neither Citigroup nor Switzerland’s UBS admitted nor denied any wrongdoing
in the marketing and sale of the securities. Citigroup will be buying back roughly $7 billion in ARS’s while UBS’s repurchase exceeds $22 billion.
The banks came under fire from several state securities regulators including New York and Texas and agreed to buy back the frozen assets under threat of being blocked from doing future business in those states. The banks also agreed to pay civil fines as part of the deal reach with the SEC and state officials.
Following wide-scale investigations into the sales practices involving ARS’s, the
regulators alleged the banks misled customers into believing that
auction-rate securities were safe, cash-like investments. The auction-rate securities market involves investors buying and selling instruments that resemble corporate debt, except the interest rates are reset at regular auctions, some as often as once a week. A number of companies invested in the securities because they could treat their holdings almost like cash.
Tens of thousands of investors nationwide – including cities and towns,
charities and small businesses – were left holding damaged securities
that couldn’t be readily sold for cash once the market for auction-rate
securities dried up in February.
Settlements calling for buybacks of auction-rate securities also have
been reached with Bank of America Corp., RBC Capital Markets Corp.,
Morgan Stanley, JPMorgan Chase & Co., Wachovia Corp., Merrill Lynch &
Co., Goldman Sachs Group Inc., Deutsche Bank, Credit Suisse Group and