After months of regulatory pressure, Wall Street banks on Thursday took a U-turn, when they said they would compensate tens of thousands of investors who find themselves stuck in the frozen market for auction-rate securities.
Citigroup on Thursday agreed to buy $7.5bn worth of ARS from retail investors in the next three months while Merrill Lynch announced that it would buy back ARS it sold to investors starting next year. There are currently $12bn of such holdiings but Merrill said it expected there would be $10bn by the time it begins its buy-back. UBS was on Thursday night close to finalising the details of its own deal with regulators.
The development, which marks one of the biggest settlements in Wall Street history, reflects the banking industryâ??s desire to draw a line under the regulatory probes that were beginning to damage reputations.
The securities, sold by municipalities and other issuers, are long-term debt but interest rates are periodically reset at auctions. But the banks that supported the market stopped doing so in February and regulators have alleged that they misrepresented the debt as illiquid, cash-like instruments.
