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2 More Banks to Buy Back $7 Billion in Securities

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 investors.

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 Dec. 11.

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.

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