Pushing to put one of the biggest debacles of the credit crisis behind them, Citigroup Inc. and Merrill Lynch & Co. agreed to buy back $17 billion in auction-rate securities.
The moves were aimed at defusing a regulatory and legal showdown about their sales practices for securities that were touted as safe but then couldn't easily be sold and in some cases lost value after the auction-rate market froze in February. The agreements also reflect Wall Street's growing determination to climb out of the morass left by a variety of soured securities, even if that comes at a steep cost.
Citigroup's settlement with the Securities and Exchange Commission and state regulators includes the repurchase of about $7.3 billion in auction-rate securities from about 40,000 individuals, charities and businesses with assets of less than $10 million. Citigroup also vowed to use its "best efforts" to help institutional investors sell roughly $12 billion of auction-rate securities they hold.
Several hours after the Citigroup deal was announced, Merrill Lynch said it would buy back an estimated $10 billion of auction-rate securities at full value -- but not until January. The one-year offer will apply to individuals, charities and small-business clients of Merrill.
Over the last few months, we've seen stories that at least 4 states (NY, MO and two others) and at least four firms (UBS, Wachovia, Merrill and Citi) were being targeted because of abusive/misleading sales tactics in the auction rate debt markets. Essentially, the firms continued to sell the bonds to investors (an recommend them strongly) even though the firms knew the market was collapsing.
The firms will issue a statement and the AG's will agree that "this is not an admission of guilt" (or some other such nonsense). But ask yourself this question: if they didn't do anything wrong why the quick settlement?
In addition, at a time when these firms are trying to unload bad debts they are now purchasing more bad debt they will have to unload in some way. That's not good for two institutions that are already really suffering from the credit crunch.
It also leads to this point: these firms clearly lied to investors to make a buck. How can we now trust them when they say, "we don't need to raise capital"?
In other words: the credit crunch isn't anywhere near over.