Auction rate securities

Can anyone enlighten me as to why the banks have to buy these back?

Merrill Lynch, Goldman Sachs and Deutsche Bank are to buy back up to $14.5bn (£7.7bn) of illiquid auction-rate securities as part of a settlement with New York attorney general Andrew Cuomo over the mis-selling of these products to individuals and charities.

The trio of banks – none of which has admitted any wrongdoing by agreeing to settle – will pay a total of $162.5m (£67m) in fines as part of the deal, the latest in a series of such settlements.

The $330bn auction-rate securities market, which sold short-term municipal and other bonds whose interest rates regularly reset at weekly or monthly "auctions", collapsed in February as a result of the global credit crunch and the crisis in confidence in a number of major bond insurers.

I understand roughly what the securities are, but why the buy back and the fines. Does caveat emptor no longer hold?

6 thoughts on “Auction rate securities”

  1. I would bet the buy-back is more a political than legal requirement.

    This particular AG is hyper-ambitious (even by the standards of a normal politician). The firms undoubtedly chose the path of least resistance, albeit at a steep price.

    Maybe ML can book this event/loss in the UK as well. That would certainly be fun reading from our favourite retired (chartered) accountant….

  2. I was talking to the GC of a large US financial services outfit earlier in the week who was telling me about his recent experiences with the New York AG’s office. If he is to be believed, they are balatant shakedown artists.

  3. This all started when Elliot Spitzer was New York’s Attorney General. He pursued Wall Street firms for alleged wrong-doings, tried them in the media then used his power to subpoena documents to build his cases after he had publicised them. This tended to have negative effects on the stock prices, and by extension the bonuses of those in charge.

    Then, before going to trial he would offer them a chance to pay some nine-figure fine to make it all go away.

    Have a look here: Wikipedia

    This is why a lot of people in New York took such delight in Spitzer’s subsequent fall from grace.

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