NEW YORK - Wall Street's costs to end federal and state investigations of the auction-rate bond market's collapse may wind up exceeding the sanctions from abuses of mutual funds and analyst research in the past decade.
UBS AG and Citigroup Inc. agreed last week to buy about $26 billion of auction-rate bonds from clients and pay $250 million in fines after regulators said the firms marketed the securities as safe alternatives to money-market investments. Merrill Lynch & Co. disclosed a plan to purchase $10 billion. JPMorgan Chase & Co., Morgan Stanley, and Wachovia Corp. received letters yesterday from New York Attorney General Andrew Cuomo requesting they begin "immediate" settlement talks.
Banks may have to write down the debt they buy from customers by $4 billion, Bank of America Corp. analyst Jeffrey Rosenberg said in a report last week.
The probe of mutual-fund abuses from 2003 yielded more than $5 billion in penalties and agreements to reduce fees, while Cuomo's predecessor, Eliot Spitzer, and regulators including the Securities and Exchange Commission won $1.4 billion from 10 firms accused of using tainted research to win investment-banking deals.
Is that why Spitzer was outed?
"These are developments of gigantic, historic proportions," James Cox, a securities law professor at Duke University in Durham, N.C. "Never have we witnessed defendants, who created a product that isn't inherently illegal, being required to buy back such a large market."
Securities firms may avoid additional fines if they use "best efforts" to help their clients get out of the securities, the SEC said last week when the settlements were revealed.
Banks will need to find ways to dispose of the auction-rate securities to recoup their money. The strategy used by mutual funds may provide a partial solution. Boston-based Eaton Vance Corp., Chicago's Nuveen Investments Inc., and BlackRock Inc. in New York developed new preferred shares that carry a "put" option, which guarantees that an investor can sell back their securities when needed. Money raised from the sale of the new securities will be used to retire the auction-rate preferred shares.
Put options? Does that ever raise RED FLAGS!!!
Banks may reverse their write-downs by pushing for more deals to refinance the auction-rate securities.
"If the banks themselves are taking them back onto their balance sheets, they're not going to be slow to offload that liability," said James Colby of Van Eck Associates in New York.
"New York prods firms to settle auction-rate securities probe" by Bloomberg News | August 12, 2008NEW YORK - New York Attorney General Andrew Cuomo sought to accelerate the investigation of auction-rate securities sales, asking JPMorgan Chase & Co., Morgan Stanley, and Wachovia Corp. to begin "immediate" settlement talks.
Auction-rate securities are typically bonds whose interest rates are reset by periodic bidding. Investors were left unable to redeem securities that were billed as equivalent to cash after the dealers that ran the bidding in February suddenly stopped supporting the market as they had for years.
Cuomo is demanding that banks create auction-rate securities buyback programs for retail customers, reimburse consumers forced to sell off their securities at "below par" prices, and institute a claims resolution mechanism.
UBS, Switzerland's biggest bank, is to pay $150 million in fines and begin buying back $18.6 billion in failed auction-rate securities, the largest settlement in the investigation.
I don't quite understand it all, but what it sounds like is a lot of banks shuffling paper!!!
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