Merrill and Citi to repurchase ARS after New York applies pressure
Citi and Merrill Lynch have agreed to repurchase billions of dollars worth of illiquid auction rate securities (ARS) being held by retail customers after threats of legal action from New York attorney general Andrew Cuomo.
Under plans announced yesterday, Merrill will buy back ARS paper at par from retail clients who have been stuck holding the notes since broker-dealers abandoned the market in mid-February. The move will affect 30,000 customers holding an estimated $12 billion in the frozen securities, although the offer is only effective from January 15, 2009, meaning some small investors will have been trapped holding the instruments they bought as 'cash equivalents' for 11 months by the time they manage to escape their positions. The pain of being locked into these notes has been offset somewhat by the substantial penalty rate coupons investors have collected in recompense for inconvenience since the market froze up. The Merrill repurchase coincided with Citi’s announcement that it too will offer to buy at par all frozen ARSs held by individual investors and small institutions by November 5. The value of the ARS notes eligible for purchase totals approximately $7.3 billion, with Citi estimating the difference between the purchase price and the currently depressed market price to be in the region of $500 million. Citi also disclosed that it will pay a $50 million fine to the State of New York and an additional $50 million to other state regulatory agencies, with the New York attorney general retaining the right to take legal action against Citi with respect to the resolution of its institutional investor clients’ ARS positions as of November 4. The attorney general’s office has already bared its teeth over the ARS matter. Last month, Cuomo announced a lawsuit against UBS, alleging that senior managers sold off their personal auction rate holdings just days before UBS pulled out of its role in supporting the market as an auction agent and buyer of last resort. With both Merrill and Citi acknowledging the role played by Andrew Cuomo and other agencies in taking this action, it appears likely that the other major ARS dealers – JP Morgan, Goldman Sachs, Morgan Stanley, Lehman Brothers, Royal Bank of Canada and Wachovia – may present similar pledges to assist retail customers in the coming weeks. Analysts at Bank of America Securities have estimated that, based on an ARS market value of $330 billion at the end of 2007, if settlements such as those seen at Merrill and Citi are replicated, the total potential for additional writedowns across all dealers would be approximately $4 billion. See also: New York sues UBS for alleged auction rate securities fraudInvestors caught short by auction rate meltdown
Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.
To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe
You are currently unable to print this content. Please contact info@risk.net to find out more.
You are currently unable to copy this content. Please contact info@risk.net to find out more.
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. Printing this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions - https://www.infopro-insight.com/terms-conditions/insight-subscriptions/
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. Copying this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions - https://www.infopro-insight.com/terms-conditions/insight-subscriptions/
If you would like to purchase additional rights please email info@risk.net
More on Regulation
Banks will not be frowned upon for discount window borrowing – Fed official
Risk Live: more banks have completed paperwork to access Fed lending facility than a year ago
Capital One puts OCC’s tough stance on mergers to the test
Proposed Discover deal should be approved but will go under the microscope, ex-regulators say
As FCMs dwindle, regulators fear systemic risk
Panellists highlight dangers of clearing membership becoming more concentrated
EU banks fear green asset ratios paint an unfair picture
Industry lobbyist clashes with lawmaker over usefulness of new sustainability disclosure
EU watchdogs to launch prop trader capital review in April
Prop traders say bank-style IFR rules are driving them out, but doubt EBA will suggest changes
Investors say new SEC disclosures may sit on shelf
Advisory committee questions value of rule 605 changes, even for retail investors
CFTC hears ‘call to action’ from swaps end-users on Basel III
Commissioner Pham mulls engaging with prudential regulators over capital hit on clearing
Iosco gears up for ‘intensive work’ on AI regulation
Watchdogs risk ‘falling behind the curve’, secretary-general warns; FSB also working on guidance
Most read
- As FCMs dwindle, regulators fear systemic risk
- Top 10 operational risks for 2024
- Top 10 op risks: AI fears drive cyber risk to record high