Thursday, August 7, 2008

Citigroup Reaches Settlement On $19.5 Billion of Auction Debt

This sounds like paper that is worthy of laying off on the Fed through the discount window or a term auction facility.

Citigroup has agreed to buy back or help clients unload as much as $19.5 billion in auction-rate securities and will pay a $100 million fine to settle U.S. regulatory claims it improperly saddled customers with untradeable bonds.

Citigroup will buy back about $7.5 billion in securities from individual customers, charities and small businesses under a settlement with New York State Attorney General Andrew Cuomo, the Securities and Exchange Commission and a group of states, led by Texas, the SEC said in a statement today. It must also start ``restoring liquidity'' to more than 2,600 institutions holding about $12 billion of the instruments, the SEC said.

Citigroup agreed to buy back illiquid securities from about 40,000 customers by Nov. 5 and compensate clients who already sold their holdings at a loss, according to Cuomo.

The agreement also requires that Citi make ``best efforts'' to help 2,600 institutions by the end of 2009, the SEC said. Cuomo reserved the right to take legal action, and the SEC may seek a fine, if the bank doesn't do enough for those investors.

Citigroup estimated that securities eligible for the buyback have a face value of $7.3 billion and may be worth about $500 million less on the market than their purchase price.

Auction-rate securities are bonds or preferred shares whose interest rates are reset by periodic bidding run by dealers. Firms including Citigroup abandoned their routine role as buyers of last resort for the debt in mid-February as demand dried up, allowing the market to collapse and leaving investors stuck in what had been pitched to them as money-market-like instruments.

Note: Charles Keating went to jail for something pretty close to this.

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