Bank of America agrees to $4.5b bond buyback

Bank of America Corp. yesterday agreed to buy back more than $4.5 billion in auction-rate securities from its customers under a nationwide settlement brokered by the Massachusetts Securities Division.

The deal, which will unfreeze the investments of 5,500 Bank of America clients, is the ninth agreement regulators have sealed with major financial institutions over auction-rate securities sales. Altogether, the firms have agreed to buy back nearly $60 billion of these investments - the largest return of money to investors in history, according to the Securities and Exchange Commission.

The bank neither admitted nor denied the allegations, but said it would start buying back the securities of individuals, small businesses, and nonprofits after Oct. 1. The company, whose brokerage business is based in Boston, said it would work with larger, institutional customers to restore their funds "expeditiously and on a best efforts basis."

Amid its negotiations with the state's Securities Division, Bank of America agreed last month to buy back $43 million of auction-rate securities it had sold to the Massachusetts Turnpike Authority and the Massachusetts Housing Partnership. The bank said yesterday it would do the same for other government entities.

"The priority for us always has been to restore funds for investors as quickly as possible," said Secretary of State William F. Galvin, who oversees the Securities Division. "People have been without full access to their money now for many, many months."

Auction-rate securities are bonds issued by municipalities and nonprofits like student lenders. For years, they traded routinely at auctions run by brokers, enabling issuers to borrow money at cheap rates and giving conservative investors a return slightly better than money markets. But amid other credit turmoil in the markets, brokerages all stopped trading these bonds around Feb. 13, leaving thousands of investors stranded in a $330 billion market without warning.

"It's a cash-flow crunch," said George W. Cody, special assistant to the president at Bastyr University, a graduate and professional school in Kenmore, Wash. He said Bastyr had invested in auction-rate securities for several years as a short-term place to park cash. But it was caught in a predicament when the market shut down, with a seven-figure sum suddenly unavailable to the small school.

Part of the money had been an anonymous major gift toward the endowment, received late last year and placed in auction-rates only until the school decided how best to invest it. Other frozen funds had been slated to pay for immediate school expenses in the winter quarter. The school had to tap other funds instead.

"It has been challenging to meet the fiduciary obligation that, as a small institution, we have to our tuition-paying students," Cody said. He had feared that it might take two or three years to resell the bonds if Bank of America had not agreed to buy them back.

The Globe has reported that Bank of America warned some large investment banking clients, including the state of California, about the looming trouble in the auction-rate market last December. But at the same time, it continued to sell the securities to investors without such warnings.

The bank last week said it was working with regulators and was eager to resolve the investigations by Massachusetts, New York, and federal regulators. The SEC yesterday said it expected to reveal terms of its own preliminary settlement with Bank of America soon.

The state did not fine Bank of America in this case.

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