Forcing Bank Buybacks May Not Help Individuals

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The New York Sun

Attorney General Cuomo’s effort to force buybacks by Wall Street banks and brokers of auction-rate securities may not help some individual investors.

In the last two weeks, Mr. Cuomo reached agreements with Citigroup Inc., UBS AG, Morgan Stanley, JPMorgan Chase & Co., and Wachovia Corp. to begin buying back $42 billion of the debt they sold directly to individuals. The accords don’t extend to investors holding most of the remaining $160 billion bought through mutual fund firms or brokers that didn’t underwrite the debt.

“This is a glaring oversight,” an investor in New York who holds auction-rate debt underwritten by Goldman Sachs Group Inc. that he purchased from a different brokerage he declined to identify, Jonathan Kahn, said.

Mr. Cuomo said the New York-based investment bank is still negotiating with regulators. “The industry is now taking responsibility for correcting a problem they helped create, and we’ll continue working to make all investors whole,” Mr. Cuomo, 50, said in a statement on August 15.

Investors have been stuck in the securities, which are long-term debt that have interest rates typically set every seven, 28, or 35 days through periodic auctions, since the market collapsed in February. Dealers, who for two decades bought debt that went unsold at auctions, suddenly pulled back because of widening credit-market losses. Investors who were told the debt was as safe and liquid as money-market funds were left with depreciating securities they couldn’t sell as auctions failed. Mr. Cuomo says the brokerages continued to market the debt as cash equivalents even though they knew demand was weakening.

“At the heart of this investigation is the simple goal of returning billions of dollars back into the hands of investors, which in turn injects confidence into the entire market,” Mr. Cuomo said in the August 15 statement.

The auction-rate probes focused on the biggest underwriters because those banks have the largest concentration of clients holding the debt, Mr. Cuomo said. Citigroup was the market’s biggest underwriter, arranging $55.3 billion in municipal auction-rate debt sales between 2000 and 2008, followed by UBS at $42.4 billion, according to data from Thomson Reuters.

The market has shrunk to about $200 billion from $330 billion as borrowers refinanced the securities using other types of debt. Individuals are the biggest holders, followed by publicly traded companies, which own about $32 billion, according to Pluris Valuation Advisors LLC in New York.


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