Merrill, Goldman, Deutsche in deal with regulators over auction rate securities

By Joe Bel Bruno, The Associated Press

NEW YORK - Merrill Lynch & Co., Goldman Sachs Group Inc. and Deutsche Bank on Thursday joined other major financial companies in settling with regulators over their roles in selling risky auction-rate securities to retail investors.

The agreements bring to eight the number of global banks that have settled the five-month probe into claims they misled customers into believing the investments were safe. New York Attorney General Andrew Cuomo, leading the investigation on behalf of state and federal authorities, has now reached deals to buy back US$57 billion worth of auction-rate securities.

Cuomo said Thursday he is far from finished in examining both large and small players in the market, and said the investigation will intensify against Bank of America Corp. He also warned that the investigation might shift its attention to individual brokers and bank employees who sold the investments.

"This has been a great day of progress," Cuomo said during a conference call with reporters. "We have a number of banks that are still under investigation, and we are obviously having conversations about resolution. The one thing the people want is their money back quickly."

He had been in talks with Merrill Lynch chief executive John Thain through most of the afternoon before reaching a deal. Cuomo had set a deadline of Thursday for the largest U.S. brokerage to reach an agreement or face a lawsuit.

Thain said the brokerage, which last week agreed to repurchase the debt on a voluntary basis, would "accelerate the plans" by buying back US$10 billion to $12 billion of the investments from investors by Jan. 2 and pay a fine of $125 million.

Separately, Deutsche Bank, which must buy back about $1 billion of auction-rate securities, has been fined $15 million. Goldman Sachs has $1.5 billion in securities to buy back, and will be fined $22.5 million.

The investigations are examining how brokerages sold auction-rate securities before the $330 billion market collapsed in February. Federal and state authorities believe that banks pitched the investments as safe.

UBS AG, Citigroup Inc., Morgan Stanley, JPMorgan Chase & Co. and Wachovia Corp. had previously agreed to buy back their auction-rate securities.

Also Thursday, Massachusetts Secretary of State William Galvin said Thursday Merrill Lynch agreed to settle a similar dispute.

Galvin, who is the top securities regulator in Massachusetts, said the agreement calls for Merrill to buy back beginning Oct. 15 all illiquid auction rate securities from investors who have less than $3 million on deposit.

In addition, after Jan. 15, Galvin said Merrill agreed to buy back auction-rate securities from investors with deposits on account of $100 million or less. Massachusetts filed its enforcement action on July 31.

The auction-rate securities market involved investors buying and selling instruments that resembled corporate debt, but the interest rates on the investments were reset at regular auctions, some as frequently as once a week. A number of companies and retail clients invested in the securities because they could treat their holdings almost like cash.

But the market for them collapsed in February amid the downturn in the broader credit markets. Regulators have been investigating the collapse in the market to determine who was responsible for its demise and whether banks knowingly misrepresented the safety of the securities when selling them to investors.