Major banks must buy back ARS

Major fines have been levied on three financial houses – Merrill Lynch, Deutsche Bank and Goldman Sachs – following investigations into the alleged mis-selling of auction-rate securities.

The three have agreed to buy back the securities, and total fines of over $160 billion will be levied on the companies. The buy- back is scheduled to begin this October.

New York Attorney General Andrew Cuomo agreed the deal with Merrill chief executive John Thain in a meeting on Thursday, and explained that he had been prepared to begin a law suit against Merrill Lynch should the agreement not have been met.

$125m fine

Merrill Lynch will pay, as part of the settlement, a $125 million fine with Goldman Sachs and Deutsche Bank a total of $22.5 million and $15 million respectively.

It is understood that Goldman Sachs and Deutsche bank soles $1.5 billion and $1 billion of auction rate securities respectively, and that they have agreed to pay the stated fines as part of the agreed settlement.

Although the settlements have been agreed to, this does not amount to absolution with regard to individuals at any of the three financial institutions, with Cuomo explaining:
 
“We could still bring actions against individuals.”

There was no word, however, of either the names of, or how many, individuals that are under investigation.

Previous offer

In the past UBS, JPMorgan, Morgan Stanley, Citigroup and Wachovia have all had to enter into settlements to buy back in excess of $45 billion in auction rate securities having been accused of similar mis-selling, with a total of $360 million in fines having been paid by the aforementioned.

Merrill Lynch had previously made an offer to buy back their share beginning in January, but this has now been brought forward to October.

The collapse of the auction rate security market in February affected $330 billion worth of stocks, and brought to the fore the liquidity risk involved in the purchase of these long-term securities. Auction rate security interest rates are revised on a weekly or monthly basis and have traditionally been popular with short-term investors.

With the banks withdrawing their support in February, the market has been static since, leading to the ongoing investigations by the District Attorney and by the Securities and Exchange Commission, and ultimately to the fines and agreements to buy back securities arrived at on Thursday.