August 15, 2008 01:02 PM ET
Two banks, JPMorgan Chase & Company and Morgan Stanley, on Thursday
became the latest banks to reach settlements with the New York attorney
general, Andrew M. Cuomo, and other regulators as part of a
investigation into the collapse of the auction-rate securities market.
The pair of banks will repurchase a combined $7 billion in the troubled
securities from investors. Morgan Stanley agreed to pay a fine of $35
million, while JPMorgan will pay a fine of $25 million.
JPMorgan and Morgan Stanley are the third and fourth to reach
settlements, after deals by UBS and Citigroup last week. Regulators
continue to investigate other banks as well.
Mr. Cuomo said his office continued to discuss settlements with
additional banks that sold the securities.
Mr. Cuomo’s office, the Securities and Exchange Commission and other
state regulators reached settlements that required Swiss bank UBS to
repurchase $18.6 billion in the securities, while Citigroup agreed to
buy back $7 billion of the securities. UBS will also pay a fine of $150
million, while Citigroup will pay a $100 million fine.
The $330 billion auction-rate securities market involved investors
buying and selling instruments that resembled corporate debt, except the
interest rates were reset at regular auctions, some as frequently as
once a week. Several companies and retail clients invested in the
securities because they could treat their holdings almost like cash.
The bond-like investments were widely held by many institutional and
individual investors and were seen as highly liquid, money market-like
investments. However, 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
Like last week’s settlements, JPMorgan and Morgan Stanley agreed to
repurchase the securities and will reimburse customers who sold their
securities at a loss after the market collapsed in February.
JPMorgan will repurchase all securities it sold to retail customers,
charities and small to midsize businesses by Nov. 12. JPMorgan will also
buy back any securities sold by Bear Stearns, which it acquired earlier
in the year.
Morgan Stanley will repurchase the securities from similar groups by
The $60 million in fines will be distributed to states based on the
amount of securities sold to investors in each state. In the previous
settlements with UBS and Citigroup, New York received half the fines and
the rest were distributed among other states.