MercoPress. South Atlantic News Agency

NY prosecutors make banks repay billions for misselling

Repaying excesses of bull market at bear market times

New York State's attorney general has threatened to sue Merrill Lynch for misrepresenting certain debt investments as safer than they were. Andrew Cuomo said that legal action against the US bank was “imminent” after it failed to settle charges of mis-selling with regulators.

Last week, Merrill Lynch offered to buy back 12 billion US dollars of auction-rate debt. It said it was surprised by the threat. It comes amid a wide-scale inquiry into mis-selling of these investments. Mr Cuomo said that the bank's voluntary buyback was not an adequate amount. In a statement, Merrill Lynch said: "We have been discussing this issue with New York and other regulators since we announced last week our plan to purchase our retail clients' ARS (auction-rate securities) and we thought we were making progress. We anticipated further talks," the firm added. Within the past eight days, the office of the New York State attorney general has signed agreements to restore billions of dollars to investors around the US. The country's fourth largest lender, Wachovia, is the latest to settle charges with state regulators, agreeing to buy back 8.5 billion worth of auction-rate securities and reimburse customers who had sold these investments at a loss. North Carolina-based Wachovia will also pay fines of 50 million as part of the settlement with New York State and other regulators, including the Securities and Exchange Commission (SEC). The deal with Wachovia follows similar ones with Citigroup, UBS, JP Morgan and Morgan Stanley. Last week Morgan Stanley and JP Morgan Chase announced they had agreed to buy back more than 7 billion of securities and pay fines to settle allegations that they misled investors. Under the deal Morgan Stanley will buy back about 4.5 billion worth of auction-rate securities at face value by 11 December.JP Morgan Chase has agreed to redeem about 3 billion of auction-rate debt it sold to customers by 12 November. Its settlement also covers debt sold by Bear Stearns, which it bought earlier this year. However neither bank admitted or denied wrongdoing. Last week also the New York Attorney and the Securities and Exchange Commission (SEC) reached settlements with Citigroup and Swiss banking giant UBS that required the pair to repurchase in total 26 billion of the securities. The crackdown by US regulators comes after the market for auction-rate securities collapsed in February amid the wider credit crisis as investors lost interest in everything but government bonds. Municipal authorities and state agencies, such as student-loan bodies, have been the worst affected by the problems in this market because they frequently used auction-rate securities to raise funds. It was a popular choice because investors thought of the debt products as highly liquid investment, almost as safe as cash, but with a higher return. US authorities are investigating how auction-rate securities were marketed throughout the industry before the 330 billion US dollars market collapsed in February.