Citigroup to buy back 7.5 bln dlrs of tainted securities
The vast buyback forms part of a preliminary settlement Citigroup has reached with the Securities and Exchange Commission (SEC) and other regulators tied to its marketing of complex debt instruments called auction rate securities.
The settlement, which comes as Citigroup struggles to shake off billions of dollars in losses tied to mortgage investments, could apply fresh stress to the global bank's finances and make it the target of investor lawsuits.
The deal, which has to be formally approved by the SEC, also requires Citigroup to "liquidate" by the end of 2009 some 12 billion dollars' worth of auction rate securities it sold to institutional investors.
"This settlement in principle is an outstanding example of federal and state regulatory cooperation for the benefit of investors and markets," said Linda Chatman Thomsen, the head of the SEC's enforcement division.
The accord was unveiled by regulators as a widespread credit crunch Credit Crunch
An economic condition whereby investment capital is difficult to obtain. Banks and investors become weary of lending funds to corporations thereby driving up the price of debt products for borrowers. continues to roil major Wall Street banks.
Officials said the 7.5-billion-dollar buyback will benefit around 38,000 investors, small businesses and charities who had purchased auction rate securities from Citigroup.
Citigroup -- which has a market worth of 104 billion dollars -- meanwhile will seek to make good over 2,600 institutional investors who hold 12 billion dollars' worth of the stressed securities.
"We are pleased to reach this agreement in principle with the New York New York, state, United States
New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of attorney general, the Securities and Exchange Commission, and other state regulatory agencies state regulatory agency A state body responsible for establishing professional standards, and for certifying professionals or organizations through appropriate documentation ," Citigroup said in a statement.
The bank said it was focusing on the "best and fastest route to providing liquidity to our clients."
Auction rate securities, essentially debt instruments issued by financial firms, municipalities and student loan companies, typically have a fairly lengthy maturity. But the interest rates on such securities can be volatile and change at weekly and monthly auctions run by banks.
The instruments provided a lucrative business for many banks in recent years, but the market for auction rate securities imploded im·plode
v. im·plod·ed, im·plod·ing, im·plodes
To collapse inward violently.
1. To cause to collapse inward violently.
2. in February as a sweeping credit squeeze credit squeeze
Restricted bank lending that is accompanied by rising short-term interest rates and a decline in economic growth. Credit squeezes are generally attributed to policy actions of the Federal Reserve. -- which began in the US housing and mortgage markets -- worsened.
Citigroup was one of the largest marketers of auction rate securities before the market collapsed, leaving many of its investors nursing paper losses.
The Klayman & Toskes law firm said it would be seeking "consequential damages Injury or harm that does not ensue directly and immediately from the act of a party, but only from some of the results of such act, and that is compensable by a monetary award after a judgment has been rendered in a lawsuit. " on the behalf of disgruntled dis·grun·tle
tr.v. dis·grun·tled, dis·grun·tling, dis·grun·tles
To make discontented.
[dis- + gruntle, to grumble (from Middle English gruntelen; see Citigroup investors.
The SEC said Citigroup had marketed auction rate securities as "liquid" investments, suggesting they were almost as safe and accessible as cash. But regulators said the securities were illiquid Illiquid
An asset or security that cannot be converted into cash very quickly (or near prevailing market prices).
A house is a good example of an illiquid asset.
See also: Cash, Liquidity
In the context of finance. , and that investors could not reclaim their holdings quickly.
The settlement comes on the heels of a related investigation by New York state attorney general The New York State Attorney General is the chief legal officer of the State of New York. The office has been in existence in some form since 1626, under the Dutch colonial government of New York. Andrew Cuomo into the bank's practices.
"Citigroup marketed and sold auction rate securities as safe, cash-equivalent products, when in fact they faced increasing liquidity risk," Cuomo said, adding "this type of action will not be tolerated."
Wall Street banks are required to follow strict guidelines in how they market investments to potential customers.
Citigroup has agreed to pay two civil penalties of 50 million dollars each to New York state and the North American Securities Administrators Association The North American Securities Administrators Association (NASAA), founded in Kansas in 1919, is the oldest international investor protection organization. NASAA was created to protect consumers who purchase securities or investment advice, and their jurisdiction extends to a (NASAA NASAA
See North American Securities Administrators Association (NASAA). ).
Cuomo's office and a NASAA task force are probing how other big banks and brokerage firms marketed auction rate securities.
Citigroup's shares, which have dived over 60 percent in the past year, closed down 6.2 percent at 18.47 dollars in New York in the wake of the SEC's announcement.