Brokerages start buying back frozen securities
At least three major brokerage firms have started buying back auction-rate securities, as they promised to do in recent settlements with regulators. They are doing so even though the Securities and Exchange Commission, under fire amid the Wall Street meltdown, has yet to officially sign any of the orders.
Legally the firms could renege on the agreements, according to a veteran securities lawyer. But they are unlikely to do so and risk their reputations further.
The SEC declined to comment.
State regulators and the SEC secured about $60 billion in auction-rate settlements from nine major firms over the summer, requiring them to let investors sell securities they've been trapped in since February. So far, the firms - some of which are now merging out of existence - say they are honoring the agreements.
Merrill Lynch & Co. and Bank of America Corp. said they started buying back $14.5 billion of these bonds and preferred-stock investments on Wednesday. Bank of America's deal to acquire Merrill, the nation's largest brokerage, does not affect those obligations, the firms said.
"We have begun to purchase auction-rate securities from our smaller retail clients and former retail clients. The purchases have gone smoothly and have met our expectations," Merrill spokesman Mark Herr said. In January, Merrill will offer to purchase auction-rate securities from clients with accounts larger than $4 million.
At Bank of America, spokesman Jon Goldstein said, "The program is up and running."
Auction-rate securities were the $330 billion problem that exploded just before the mortgage-securities hurricane hit Wall Street. The investments, mainly the bonds of nonprofits, froze entirely in February, ensnaring thousands of investors who thought they owned something as safe as a money market.
The ordeal, and the SEC's slow response to it, was another bad chapter in the book of Wall Street excesses and lax regulation, which have come to characterize this chaotic period in the financial markets.
Many Wall Street firms sold auction-rate securities as safe alternatives to cash, without disclosing the risks. Indeed, most brokers were not aware the market could stop trading entirely, ensnaring their clients' funds for months.
Regulators, including Massachusetts Secretary of State William F. Galvin and New York Attorney General Andrew M. Cuomo, brought cases against the firms, showing that a number of them knew the market was in trouble but did not tell their brokers or customers.
All of that preceded last month's financial meltdown: Lehman Brothers Inc. went bankrupt, Merrill was sold, two major banks failed, and world markets waited to see whether Congress would pass a $700 billion bailout bill. A spokesman for Galvin said the changed landscape does not alter the settlement terms. "As these companies take over each other, they inherit their obligations as well as their assets," said Brian McNiff.
A Cuomo staff member said the settlements stand despite the SEC's failure to sign the orders.
Goldman Sachs Group on Aug. 21 agreed to start buying back $1 billion of auction-rate securities from high-net-worth clients. The firm said it would complete the buyouts by Nov. 12. "We fully intend to meet our deadline," spokeswoman Andrea Raphael said.
Swiss banking firm UBS Financial Services Inc., which agreed to buy back $19 billion in auction-rate securities, said it is on schedule to do so starting Oct. 31. Citigroup Inc. said it will buy back the investments by Nov. 5. Wachovia Corp., which is selling its banking operations to Citigroup, said the sale should not interfere with its buyback.
Beth Healy can be reached at bhealy@globe.com. 