2 more banks to settle over securities

[flashl]

Morgan Stanley, JPMorgan agree to buy back $7 billion

By STEPHEN BERNARD Associated Press
Aug. 14, 2008, 10:53PM

NEW YORK — JPMorgan Chase & Co. and Morgan Stanley on Thursday became the latest banks to reach settlements with New York Attorney General Andrew Cuomo and other regulators as part of an investigation into the collapse of the auction-rate securities market.

The pair of banks will repurchase a combined $7 billion in the troubled securities at face value from investors. Morgan Stanley agreed to pay a fine of $35 million, while JPMorgan will pay $25 million.

JPMorgan and Morgan Stanley are the third and fourth to reach settlements, following deals by UBS and Citigroup last week. In addition, Wachovia Corp. was in a final round of talks with Cuomo, according to a person close to the talks who spoke on condition of anonymity because the agreement had not yet been finalized. The Charlotte, N.C.-based bank was close to agreeing that it will buy back $8 billion of auction-rate securities by the end of the year, the person said.

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.

[TNDemo]

1. What exactly does it mean when they buy back securities?

In the language of Finance for Dummies.

[A HERETIC I AM]

2. Auction Rate Securities are Bonds.

Most Bonds are issued with a specific "coupon" or interest rate, have a maturity date and are tradeable. Bond traders bid the price of the bond up or down based on a number of factors including the perceived credit worthiness of the issuer.

Auction Rate Bonds are issued with a specific maturity date, but the interest rate they pay is set at regular auctions. They have an advantage to an issuer in a declining interest rate environment because the issuer stands to save lots of money if the auction results in lower interest rates.

The problems arose when the confidence in the auctions collapsed. Some were held weekly, others bi-weekly and others monthly.

If you had purchased some of these into your account from your broker, you expected that they would be easily sold at the auction, should you want the cash. When the auctions began failing, investors got (understandably) pissed because they now have a security for which there is no market, or one that has narrowed considerably. They were represented as an alternative to Money Market funds. Not quite as liquid but nearly so. I had read about them and learned a bit about them back in November and put up a thread about them in the Personal Finance and Investing Forum. Here is that thread. By February, it had become apparent there was a major problem with the auctions and I posted a reply to my own thread, stating there were no longer something one should consider.

JP Morgan, Morgan Stanley, UBS & Citigroup have agreed to buy these bonds back from their clients "at face value" which means $1,000 per bond (typically).

That's it. The banks/brokers are taking these bonds back into their own books, and paying their clients face value for them.

It is important to keep in mind that this situation did not mean the bonds were in default at all, it was simply a liquidity problem. The overwhelming majority of these securities continue to pay regular interest payments to the holders and many were "called" by the issuers and replaced in the market with more conventional paper. Even now that the banks have or will buy them back, the issuers will continue to pay the interest rate set at the last auction or call them in.

[TNDemo]

3. Thanks!

for that nice answer.