Friday, August 15, 2008

Auction-rate buybacks top $48bn

(FT) JPMorgan and Morgan Stanley on Thursday joined other Wall Street banks in agreeing to repurchase auction-rate securities, a type of long-term debt which has lost a lot of their value, bringing the total size of the industry buyback to $48bn.

But in a notable difference from previous settlements, the US Securities and Exchange Commission was not party to the latest bank agreements with Andrew Cuomo, the New York attorney-general, and a taskforce of 12 state securities regulators.

ARS are long-term debt instruments sold by municipalities and other issuers, whose rates are periodically reset at auctions. The sector started to falter when liquidity began to dry up and Wall Street banks stepped back from supporting the market. Regulators have accused banks of misrepresenting ARS as liquid, cash-like instruments.

JPMorgan and Morgan Stanley have agreed collectively to buy back about $7bn worth of ARS from retail investors, and pay fines of $25m and $35m respectively.

They would also compensate investors who sold ARS at a loss and consent to a public arbitration process to resolve claims.

The agreements came a week after Citigroup and UBS made deals with regulators to buy back more than $26bn of ARS, and Merrill Lynch, in a voluntary offer, said it expected to buy back about $10bn in ARS – a plan that is being reviewed by regulators.

Linda Thomsen, the SEC enforcement director, said the agency’s investigations were “ongoing”.

Mr Cuomo said the settlements were the “latest victory” for investors. He said: “The industry is taking responsibility for correcting a problem they helped create, and that’s a good thing.”

But banks’ pledges have not ended action against them. New Hampshire’s securities regulator, which was party to the UBS settlement, filed a civil lawsuit against the bank on Thursday, alleging that it failed adequately to disclose to a seller of ARS that the market was at risk.

The latest suit from New Hampshire claims that UBS, which advised the state’s Higher Education Loan Corporation in the sale of ARS, told the issuer to “increase the interest paid on the bonds to attract buyers to the market, a recommendation which jeopardised the financial well being” of the organisation.

UBS said: “We will vigorously defend ourselves against this complaint as we believe that we worked in the best interests of our investor and issuer clients. This complaint attempts to link a single client interaction with overall market conditions which affected all student loan issuers, and as such we believe there is no basis for these specific allegations.”

Regulators are continuing investigations into numerous banks. Ms Thomsen of the SEC said: “Our investigations are ongoing, and include both potential corporate and individual violations of the federal securities laws. In the event that any such violations are established, the terms of today’s [Thursday’s] settlements would be taken into account.”

No comments: