US banks settle for billions over auction-rate securities

Losses and Lawsuits

NEW YORK - Attorney-general of New York Andrew Cuomo has cornered Merrill Lynch into making a $10-$12 billion settlement after threatening to sue the US investment bank for misrepresenting auction-rate securities as safe investments. The deal came only days after Cuomo said legal proceedings were "imminent" following the bank's failure to settle mis-selling charges with US regulators. Merrill Lynch will pay a $125 million fine and buy back between $10 billion and $12 billion in securities.

Meanwhile, Goldman Sachs must pay a $22.5 million fine and buy back about $1.5 billion of unwanted auction-rate securities, while Deutsche Bank will pay a $15 million penalty and buy back about $1 billion of mis-sold notes.

Cuomo's posturing follows similar settlements between the Securities and Exchange Commission and other regulators with banks Citi, Wachovia, UBS, JP Morgan and Morgan Stanley. Wachovia alone agreed to buy back $8.5 billion of auction-rate securities and pay $50 million in regulatory fines, in addition to reimbursing customers who sold their investments at a loss.

Citi, settling before Wachovia, agreed to buy back at face value the auction-rate securities of around 40,000 customers who had been unable to sell their securities since the market foundered in February, when confidence in bond insurers reached rock bottom. The securities will cost Citi $7.5 billion, while the bank has also agreed to compensate those who sold at a loss, and to pay $50 million to New York state regulators and another $50 million to the North American Securities Administrators Association. JP Morgan and Morgan Stanley have agreed to buy back another $7 million of the securities and pay $60 million in fines between them. Bank of America has yet to settle but has been subpoenaed by federal and state regulators and has admitted future writedowns of the securities could reach $4 million.

The first half of 2008 has seen an increase in subprime-fuelled class-action lawsuits relating to auction-rate securities. At this rate, they could total 280 by year's end, a 42% increase from 2007, according to a study by NERA, an economic consultancy focused on shareholder action. The research says most filings relate to subprime-tainted investments, with more lucrative settlements fuelling the trend.

And the worst is not necessarily over for the Wall Street banks. Regulators have reportedly begun industry-wide investigations of practices surrounding auction-rate securities at over 40 firms. Goldman Sachs, Deutsche Bank and Bank of America were mentioned specifically.