From the October 2008 issue of Research Magazine • Subscribe!

ARS Deals Reached with Cuomo, Others

Merrill Lynch, UBS, Wachovia, Citigroup, Morgan Stanley and other firms recently resolved a series of issues with New York Attorney General Andrew Cuomo and other state securities regulators related to sales of auction-rate securities, or ARS, though the broker-dealers neither admit nor deny the allegations of wrongdoing.

In August, according to Cuomo's office, these deals will result in the return of some $50 billion of liquidity affecting over 183,000 investors.

"After meeting personally today with Attorney General Andrew Cuomo and North American Securities Administrators Association President Karen Tyler, I am pleased to report that we have reached an amicable resolution and global settlement of this matter," says John A. Thain, chairman and chief executive officer of Merrill Lynch.

"We're pleased our clients have the certainty of a favorable resolution to this unprecedented liquidity crisis," he explains.

"We have been working on behalf of our clients since this liquidity problem began," says Robert J. McCann, president of global wealth management for Merrill Lynch. "We will continue to work actively across the industry, as well as with our financial advisors, to ensure that we continue to serve our clients well."

The company and regulators estimate that Merrill Lynch retail clients eligible for the October purchase hold an estimated $4 billion in ARS. The auction rate securities that are owned by Merrill Lynch's clients are predominantly rated AAA and not credit-impaired, the company says. In addition, the majority of the ARS are closed-end funds and municipal ARS, with about 10 percent related to student loans.

Furthermore, Merrill Lynch will participate in a special arbitration process for individual clients who incurred consequential damages from the loss of liquidity in their ARS holdings and will work with issuers and other interested parties to provide liquidity solutions for ARS held by institutional clients. Plus, Merrill Lynch will pay a $125 million penalty.

Overall, Merrill has had after-tax losses of $14 billion related to almost $52 billion in write-downs and credit-related losses, according to the Financial Times. These 18-month losses amount to about 25 percent of the $56 billion in profits made in Merrill's 36 years as a public company, according to the newspaper.

In its agreement, Wachovia will return over $8.5 billion to investors, says Cuomo's office, and pay a $50 million fine.

"Since this issue arose in February when auctions first started to fail, we have played a leading role in encouraging ARS issuers to restore liquidity to all of our clients, including those who have become part of our firm through the Oct. 1, 2007, merger of A.G. Edwards and Wachovia Securities," says Daniel J. Ludeman, president and CEO of Wachovia Securities. "The dollar value of ARS held by Wachovia Securities clients has been cut by more than 50 percent through redemptions and successful auctions. Today's agreement in principle underscores our desire to ensure that clients who purchased ARS at Wachovia receive the liquidity they need."

Wachovia estimates that the par value of ARS currently outstanding and eligible for purchase under the above offers totals roughly $8.5 billion.

As part of its deal with regulators, Morgan Stanley agreed to buy back some $4.5 billion in ARS and pay a fine of $35 million.

And Citigroup is set to buy back some $7.3 billion in ARS, which Citigroup says cost it $500 million pre-tax, and pay fines of $100 million.

"We are pleased to reach this agreement in principle with the New York Attorney General, the Securities and Exchange Commission, and other state regulatory agencies," says Citibank in a statement. "We remain committed to continuing our work on initiatives that will secure the best and fastest route to providing liquidity to our clients."

UBS reached a settlement that requires it to re-purchase $8.3 billion of ARS, at par, from most private clients during a two-year time period beginning January 1, 2009. N.Y. Attorney General Cuomo says the deal has an $11.5 billion target for funds to be returned to investors. UBS is also paying some $75 million in fines to New York and another $75 million to an investor-protection organization, according to Cuomo's office.

"Today's solution provides further relief, beginning in September, to investors who have been understandably frustrated by the industry-wide failure of the ARS market. Our leading position in supporting the market and providing liquidity is clear, and now, we are the first firm to give all clients -- private, corporate and institutional -- the opportunity to be made whole," says Marten Hoekstra, head of UBS Wealth Management Americas.

"Since the breakdown in the market, UBS clients have been offered multiple liquidity options. They have been able to borrow 100 percent against the value of their holdings. The solutions announced today provide our clients with the widest range of choices in the industry, including a two-year window during which clients can either continue to earn interest or redeem their ARS at any time," Hoekstra adds.

Shares of UBS, which has lost more than $15 billion during the credit crisis, are trading near $21, down sharply from its one-year high of $58.

---

Janet Levaux, MBA/MA, is the managing editor of Research; reach her at jlevaux@researchmag.com

Reprints Discuss this story
This is where the comments go.