Deals cut on ARS take heat off brokers, advisers

When Citigroup Inc., Merrill Lynch & Co. Inc. and UBS AG agreed last week to buy back an astounding $36.7 billion of moribund auction rate securities from their wealthy clients, the firms relieved their brokers and advisers of a giant headache.

“I think it’s wonderful news for the brokers,” said Danny Sarch, a recruiter in White Plains, N.Y. “It puts the burden back on the firm and off the broker.”

Brokers have been bogged down in tough conversations with clients who bought auction rate securities, Mr. Sarch said. Now, those conversations can progress and find an end, he said.

Last week saw a cascade of news about firms and their sales of auction rate securities.

On Thursday morning, Citigroup of New York announced its settlement with the Securities and Exchange Commission and state regulators to repurchase $7.3 billion in auction rate securities from about 40,000 clients.

After the market closed on Thursday, Merrill, also of New York, said it would buy back about $10 billion of the securities from 30,000 clients, starting in January.

Then, on Friday, UBS AG, Switzerland’s biggest bank, said it would buy back $19.4 billion in auction rate securities from clients and pay a $150 million fine to state regulators.

“This is better than good news,” said Rick Peterson, a Houston-based recruiter. The various offers are to buy back the securities at par value, he noted, and investors have still been paid the interest on the securities.

CREDIBILITY SHOT

“Brokers and their clients are in pretty good shape,” Mr. Peterson said.

“But the damage was already done in [terms of the] credibility” of the firms, he said.

“It left a bad taste in the mouths of clients and brokers,” Mr. Peterson said. “There is harm, there is foul, because credibility has been hit.”

The various buybacks and settlements may even open the door to brokers and advisers looking to leave their firms, Mr. Peterson said. “This is the reps’ way to justify a move to their clients.”

The auction rate securities market topped out at $330 billion, but it seized up in February amid the credit crunch.

New buyers shunned the market, and the auctions for the securities failed. Investors couldn’t cash out their investments.

The securities are issued by municipalities and student loan issuers and are also tied to mortgage securities.

Subsequently, investors and attorneys claimed that they were sold auction rate securities as a safe, liquid and low-risk alternative to cash, with the ability to gain 0.3 to 0.4 percentage points above a standard money market fund.

The Citigroup settlement and the Merrill buyback are for wealthy clients, but not large institutions. In Citigroup’s case, it will repurchase $7.3 billion of securities from individuals, charities and businesses with assets of less than $10 million.

Merrill’s offer, which begins in January and stands for a year, will apply to individuals, charities and small businesses.

Citigroup, however, said that it would make its best effort to help institutional investors sell about $12 billion of auction rate securities. It will also pay a $100 million fine.

UBS of Zurich, Switzerland, will repurchase the securities from clients under a settlement with New York State Attorney General Andrew Cuomo, the SEC and a group of state regulators.

The various settlements and buyback offers also potentially put a freeze on legal action against those firms, one attorney noted.

“It seems you can’t bring a claim against Citi or a court case. It appears that this could head off lawsuits,” said Tom Ajamie, an attorney based in Houston who represents investors in arbitration claims against firms.

“The regulators want people to get their money, but they’re also trying to prevent a collapse” of the banks, he said.

Mr. Ajamie added that Citigroup, Merrill and other financial institutions are dealing with a variety of severe problems stemming from the meltdown in the mortgage market.

“The regulators realize that the money is owed today, but the banks just cannot pay it out today,” he said.

E-mail Bruce Kelly at [email protected].

Related Topics: Citigroup Inc., Merrill Lynch, UBS AG