Auction-rate buybacks add to worries
Banks must simplify products to avoid regulationAs those auctions started failing, the securities unexpectedly became long-term investments for their owners, which cut into their value.
The auction-rate securities market was estimated to be about $300 billion by the trade body Securities Industry and Financial Markets Association at the end of February, around the time the auctions failed.
Other banks that have agreed to buy back auction-rate securities include Citigroup, Deutsche Bank, Goldman Sachs, JPMorgan and Morgan Stanley.
Citigroup, which agreed on August 7 to buy back $7.5 billion of auction-rate securities at face value, said in a statement it expects the difference between the purchase price and the market value to be about $500 million.
UBS said it expects the costs associated with its settlement to be about $900 million on a pre-tax basis.
Wachovia recorded a $500 million increase to its legal reserves for the second quarter as a result of the auction-rate securities investigation. In a statement this month after it settled with regulators, the bank said it expects to record a further $275 million increase in legal reserves for the third quarter.
Merrill Lynch said last week it does not expect buying back the securities to have a materially adverse impact on its capital ratios, liquidity or consolidated financial performance."
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