Brokerage HSBC offers to buy back auction-rate securities
HSBC Holdings PLC's US securities arm became the first major brokerage to offer to buy back auction-rate securities from customers unable to sell since that market froze in February.
HSBC Securities USA will buy all its clients' municipal bonds and student-loan-backed bonds sold on the auction-rate market, spokeswoman Juanita Gutierrez said in a statement from New York yesterday. The brokerage will also repurchase some auction-rate preferred shares issued by closed-end funds, Gutierrez said.
Firms organizing the $330 billion auction-rate market stopped acting as buyers of last resort when demand faltered amid concern that bond insurers would be downgraded. Investors holding about $230 billion in auction-rate securities remain unable to sell.
Auction-rate securities allowed sellers to raise long-term capital while paying short-term rates. The securities carry a fixed face value and a variable interest rate that resets at auction every 7, 28, or 35 days.
HSBC Securities didn't disclose how much its clients hold in auction-rate securities. The company said securities and banking laws prevented it from buying some closed-end preferred shares.
London-based HSBC is Europe's largest bank by market value. Its brokerage unit isn't an auction manager.
Firms that sold auction-rate securities, including Citigroup Inc. and Morgan Stanley, have been named in at least 24 proposed lawsuits in which shareholders claim they were misled and told they were buying safe, liquid investments. The companies have said the suits are without merit.
State and local governments, hospitals, and colleges were the largest users of the auction-rate market. Many were forced to pay high penalty rates when their auctions failed.
Closed-end funds also used auction-rate securities to boost returns. About 70 percent of closed-end funds borrowed money by selling preferred shares on the auction-rate market.
Debt backed by student loans makes up most of the rest of the auction-rate market.
