Citigroup to buy back $7 billion of auction-rate debt
Written on August 7, 2008
Citigroup Inc agreed to buy back more than $7 billion of illiquid auction-rate securities and pay a $100 million civil fine to settle charges it marketed the debt fraudulently.
The settlement with New York Attorney General Andrew Cuomo and the U.S. Securities and Exchange Commission could pave the way for other settlements stemming from February’s meltdown of the $330 billion auction-rate market, which boosted borrowing costs for state and local governments, hurting taxpayers.
It will also hinder Citigroup Chief Executive Vikram Pandit’s efforts to slash costs and restore the bank’s profitability following $17.4 billion of losses in the last three quarters.
“It’s really a face-saving attempt,” said Brian Yelvington, an analyst at CreditSights Inc in New York. “If Citi is able to pull this off, the other banks that have sponsored these programs could be under pressure to do something similar.”
Thursday’s settlement calls for New York-based Citigroup to buy back all illiquid auction-rate debt at face value from retail customers, charities and small- to mid-sized businesses — a total of some 40,000 customers nationwide — by November 5.
The largest U.S cash advance. bank by assets also agreed to fully reimburse all investors who sold auction-rate debt at a loss. It will pay a $50 million penalty to New York and $50 million to the North American Securities Administrators Association.
The SEC, meanwhile, said Citigroup will use its “best efforts” to liquidate $12 billion of auction-rate debt sold to institutional investors by the end of 2009.
Auction-rate securities have interest rates that reset periodically. The market was once considered safe, but much of it remains frozen after the February meltdown, in which Wall Street brokerages stopped supporting the debt.
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