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Bank of America buying back bonds

Turnpike will get $18m; Housing Partnership $25m

By Beth Healy
Globe Staff / August 28, 2008
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Bank of America Corp. has agreed to buy back $43 million in auction-rate securities from the Massachusetts Turnpike Authority and the Massachusetts Housing Partnership, as part of its ongoing negotiations with the Massachusetts Securities Division, both agencies confirmed yesterday.

The deal has freed up $18 million for the financially troubled Turnpike Authority and $25 million for the nonprofit housing agency. Government entities in other states also will get money back, the securities division said.

The local agencies, both quasi-public, invested in auction-rate securities before markets for the investments shut down in February. The securities were bonds issued by nonprofits and municipalities that paid interest rates similar to money markets. The Wall Street firms that ran the $330 billion market suddenly stopped trading the securities, amid turmoil in the credit markets, leaving thousands of investors trapped.

The firms have been under investigation by state and federal regulators for allegedly telling investors the bonds were as safe as cash.

So far, brokerage firms nationwide have agreed to buy back more than $50 billion of the frozen investments, under pressure from regulators. The Massachusetts Securities Division is still investigating Bank of America, as it seeks to press the banking giant to buy back auction-rate holdings from all of its customers - individuals and businesses as well as government entities.

"We believe that we should be successful for all of the investors, and we're going to try to do that," said Secretary of State William F. Galvin.

Bank of America declined to comment on the buybacks.

The Globe reported last week that Bank of America warned some large clients about looming trouble in the auction-rate market last December, while continuing to sell the bonds to individual investors.

In May, the Turnpike Authority was reimbursed $4.4 million for auction-rate securities it bought from another brokerage, UBS Financial Services Inc. That buyback agreement was brokered by state Attorney General Martha Coakley.

The Turnpike Authority said it held $85 million in auction-rate securities in January and has about $10 million left with Morgan Stanley & Co.

"We've substantially worked our way out of them," said Alan LeBovidge, the Turnpike Authority's executive director.

But other investors have not been so fortunate.

In New York yesterday, Attorney General Andrew M. Cuomo's office confirmed that it's looking into whether Fidelity Investments sold auction-rate securities at the urging of the New York investment firm Goldman, Sachs & Co.

Fidelity said it did no special favors for Goldman by selling its auction-rate securities.

"There was no financial incentive for the company to push auction-rate securities over other investments," Fidelity spokeswoman Anne Crowley said.

The Boston-based discount brokerage said it has 600 customers who bought auction-rate securities before Feb. 1 - less than two weeks before the market shut down - and who still own them today. The largest regulatory settlement in the auction-rate probe to date was with UBS, which agreed to buy back nearly $19 billion of the investments from 40,000 customers, following a settlement with Galvin and Cuomo.

Goldman Sachs last week agreed to buy back $1 billion in auction-rate securities from its clients and to pay a $22.5 million fine in a deal with Cuomo. The firm neither admitted nor denied wrongdoing. Goldman declined to comment yesterday.

Cuomo's inquiry into a possible Fidelity-Goldman relationship was first reported by The Wall Street Journal yesterday. The inquiry is in its initial stages, a person briefed on the probe told the Globe. The office is examining the relationship because many auction-rate securities held by Fidelity customers were underwritten by Goldman.

Goldman was the fifth-largest underwriter of auction-rate securities, according to Thomson Reuters, the news and data company. But unlike many firms in the auction-rate business, Goldman does not have a traditional brokerage force selling its products. It sold auction-rate securities to wealthy clients through its high-net-worth advisers and also offered them through outside brokers, including Fidelity.

Galvin, who oversees the Massachusetts Securities Division, has written a letter to Fidelity, urging the firm to buy back the frozen securities from its clients. Fidelity may meet with the division as early as next week to discuss its auction-rate sales activities, he said.

Beth Healy can be reached at bhealy@globe.com.

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