Auction Rate Securites
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Merrill Lynch, Deutsche Bank and Goldman Sachs settle bond dispute
August 22, 2008
By Suzy Jagger in New York
Andrew Cuomo, the New York attorney-general, last night secured financial settlements from Merrill Lynch, Deutsche Bank and Goldman Sachs, whereby the investment banks have agreed to buy back $15 billion (£8 billion) of bonds they sold to the American state.
Merrill has agreed to buy up to $12 billion of so-called auction-rate securities and to pay a fine of $125 million to regulators. Goldman will buy back $1.5 billion of the bonds and pay a $22.5 million fine, while Deutsche Bank will acquire $1 billion of debt and is to pay a $15 million fine.
The agreements come only two weeks after Mr Cuomo secured $42 billion of similar settlements from Citigroup and UBS.
The New York attorney-general has been pursuing the banks that sold the US state auction-rate securities. The assets are similar to bonds, but the rate of interest payable on the debt is determined at periodic auctions.
Mr Cuomo has argued that the banks did not make clear how risky the bonds were. In the event that no bidders take part in the auction – held every week, month or 35 days – the entire market for the bonds freezes up. Since the credit crisis started a year ago, investors have been unable to sell the bonds, which were supposed to offer immediate access to capital.
The agreement with Merrill Lynch appears to have been made after some difficulty. Mr Cuomo had threatened to file a lawsuit in the New York Supreme Court today should the investment bank fail to pay up.
Mr Cuomo said earlier: “Enough is enough. Delay doesn’t work as a tactic. I want them to come in quickly and resolve this expeditiously.”
Although Merrill Lynch agreed this month to buy back an estimated $12 billion in auction-rate securities, the company plan was voluntary and no set timetable had been made on the transactions.
Mr Cuomo said that he wanted the investment bank to buy back the securities within a set period of time and to pay fines for having sold them as safe investments to customers.
He added: “The main point is the timing of how quickly they offer the buybacks to the investors. We want that done quickly, and they had a voluntary timeframe that was not acceptable.”