By Karen Freifeld
Aug. 14 (Bloomberg) -- JPMorgan Chase & Co. and Morgan Stanley are on
the verge of completing settlements with government regulators to buy
back auction-rate securities from clients, people briefed on the
State regulators, JPMorgan, the third-largest U.S. bank by assets, and
Morgan Stanley, the second-biggest U.S. securities firm by market value,
aimed to announce the accords yesterday, the people said. Wachovia
Corp., the fourth-largest U.S. bank, also is nearing a deal, said Laura
Egerdal, a spokeswoman for Missouri Secretary of State Robin Carnahan,
who is in the talks.
"We made great progress over the weekend,'' Egerdal said yesterday of
discussions between Wachovia and a multistate task force. "There are a
few more things to work out. They are still in discussions.''
Citigroup Inc., based in New York, and Zurich-based UBS AG settled state
and federal claims last week that they improperly saddled investors with
the bonds by marketing them as alternatives to money markets. The banks,
accused of fraud, will buy a combined $26 billion of auction-rate bonds
from clients and pay $250 million in fines.
Merrill Lynch & Co. said it would offer to purchase about $10 billion of
the securities, and Morgan Stanley proposed buying $4.5 billion from
individuals this week.
Regulators said the Merrill and Morgan Stanley deals fall short. Merrill
is still negotiating a settlement, according to a spokesman for
Massachusetts Secretary of State William Galvin.
"Massachusetts is in conversations with Merrill Lynch but there are no
imminent agreements at this point,'' Galvin spokesman Brian McNiff said
yesterday in a phone interview. Galvin sued Merrill last month.
'Game was Fixed'
The $330 billion market for auction-rate securities, typically bonds
with interest rates set at weekly or monthly auctions, seized up in
February after investment banks abandoned their role as buyers of last
resort. For more than two decades, the market allowed municipalities,
student-loan agencies and closed-end mutual funds to borrow for the
long-term at rates similar to short-term debt.
"UBS pushed the sales of these instruments as 'cash alternatives'
without telling their customers of their vulnerabilities,'' Galvin said
in a June 26 release, announcing charges his office filed against the
biggest Swiss bank. "The game was fixed; only the customers were in the
dark,'' he said.
The market shrank to about $206 billion by the end of the second quarter
as municipal borrowers refinanced about 60 percent of their auction-rate
bonds and closed-end mutual funds redeemed 40 percent of their preferred
shares, based on an estimate by Bank of America Corp. analyst Jeffrey
Rosenberg last week. Banks might have to write down a total of $4
billion as they buy back auction-rate securities, he said in a report.
Wall Street's costs to end federal and state auction-rate probes may
wind up exceeding the sanctions from abuses of mutual funds and analyst
research in the past decade.
The investigation of mutual-fund abuses from 2003 cost more than $5
billion in penalties and agreements to reduce fees, while New York
Attorney General Andrew Cuomo's predecessor, Eliot Spitzer, and
regulators including the U.S. Securities and Exchange Commission won
$1.4 billion from 10 firms accused of using tainted research to win
UBS, Citigroup and Merrill were among the largest underwriters of
auction-rate debt, according to Thomson Reuters. The other main banks in
the market included New York-based Morgan Stanley, Goldman Sachs Group
Inc., JPMorgan, Lehman Brothers Holdings Inc., Toronto-based Royal Bank
of Canada, and Wachovia and Bank of America, both based in Charlotte,
Goldman has yet to reimburse clients, angering large investors in the
securities, the Wall Street Journal reported today. Goldman spokeswoman
Andrea Raphael told the newspaper the bank is working with clients to
address their financing needs.
JPMorgan said its customers own about $5 billion worth of auction-rate
securities, which includes $3 billion held by individuals, according to
an Aug. 11 regulatory filing.
Cuomo, whose office sent letters on Aug. 11 to JPMorgan, Morgan Stanley
and Wachovia asking for immediate settlement talks, wants the firms to
start auction-rate buybacks for individuals, reimburse customers who
sold bonds at "below-par'' prices, and institute a claims-resolution
Cuomo also expects any resolution to address relief for institutional
investors, refinancing fees for certain municipal issuers and penalties
Alex Detrick, a spokesman for Cuomo, declined to comment. JPMorgan
spokeswoman Tasha Pelio also declined to comment, as did Erica Platt, a
spokeswoman at Morgan Stanley, Wachovia spokeswoman Christy Phillips
Brown, Merrill spokesman Mark Herr and SEC spokesman John Nester.
UBS will buy $8.3 billion of the securities from its clients beginning
Oct. 31 under a settlement with Cuomo, the SEC and a group of other
state regulators, according to terms announced last week. The bank must
also help its institutional clients sell an additional $10.3 billion in
securities, and may have to buy back the bonds if they fail to find a
market, Cuomo said. UBS also will pay a fine of $150 million.
Citigroup was the first to settle state and federal claims last week,
agreeing to buy $7.3 billion of the debt from individual investors and
pay $100 million in fines, as well as pledging to help 2,600
institutional customers unload $12 billion of securities.
To contact the reporter on this story: Karen Freifeld in New York State
Supreme Court in Manhattan at email@example.com.
Last Updated: August 14, 2008 05:30 EDT