In a twist on current market themes, two international financial firms will actually be taking back bad investments from purchasers who were misled as to the liquidity of the purchased assets. Following a settlement with the Securities and Exchange Commission yesterday, UBS and Citigroup will return almost $30 billion to the purchasers of unstable auction rate securities (ARS) sold in 2007 and earlier this year.
Auction rate securities are a form of bond whose interest rate is determined through auction, with the winner being the purchaser who will accept the lowest interest rate. They are traditionally perceived as an ultra-liquid investment, but in February of this year, the ARS market began to weaken, with many auctions failing. Sellers of the securities subsequently refused to act as bidders of last resort, and regulators shut down the market.
Before the financial crisis, the sale of bad ARS was a main focus of the SEC, which in conjunction with New York Attorney General Andrew Cuomo, pursued several large broker-dealers to repurchase the securities, including JPMorgan Chase, Merrill Lynch, Morgan Stanley, and Wachovia.
In yesterday’s settlement, UBS agreed to repurchase $7 billion worth of ARS, while Citigroup agreed to repurchase $22.7 billion. This stipulates that each firm will repurchase its vended ARS, in addition to paying the difference for customers who sold their securities below par value.
In a statement, SEC chairman Chris Cox praised the decision: “Today’s settlements are the largest in SEC history, and represent the largest return of customer money in the agency’s 75 years…Every one of the investors covered by these settlements will be able to receive 100 cents on the dollar on their ARS investments.”