Morgan Stanley Offers to Buy Back Auction Rate Securities

Bowing to pressure from state and federal regulators, Morgan Stanley is the latest investment bank offering to buy back <"">auction rate securities.  But the New York State Attorney General’s Office, which has been investigating the auction rate securities market for the past five months, says Morgan Stanley’s offer is “too little, too late.”

Auction rate securities are long-term corporate bonds, municipal bonds and preferred stock on which the interest rates are reset periodically based on bids submitted through securities firms. Generally, rates are reset every  seven, 14, 28 or 35 days. Because they can be sold during weekly or monthly auctions, banks and brokerages often touted auction rate securities as short-term investments or cash equivalents.  Unfortunately, because of the credit crises, the market for auction rate securities crashed.  Thousands of investors have been bewildered to find out that the investments they were sold as cash equivalents are now illiquid.

Various state and federal agencies have been investigating the auction rate securities crash, amid suspicions that investment banks misled their clients about both the liquidity of the vehicles and safety of the market.

Yesterday, the New York Attorney General’s Office sent letters to Morgan Stanley, JPMorgan Chase and Wachovia Corp. urging the banks to begin settlement talks immediately.  The office was pressing the banks for agreements to buy back auction rate securities similar to those it reached with UBS and Citigroup last week.

The Citigroup settlement involves the buyback of $7 billion worth of auction rate securities from some 40,000 individual investors. The settlement also includes payment of $100 million in fines. The fine will be paid to New York state and the North American Securities Administrators Association, which represents securities regulators in the 50 states and the District of Columbia. The SEC is also said to be considering additional fines against Citigroup.

UBS, the largest bank in Switzerland, has also settled with the SEC and state regulators. Under terms of the settlement, UBS will buy back $19.4 billion of failed auction-rate securities and pay a $150 million fine.

Yesterday, Morgan Stanley offered to buy back about $4.5 billion in auction-rate securities from retail clients.  In a statement, Morgan Stanley said it will begin to repurchase notes at par value no later than Sept. 30.

Despite the offer, the New York Attorney General’s office was not placated.  “This is too little, too late, and our investigation into Morgan Stanley continues,” Alex Detrick, a spokesman for the office, said in an e-mail to Bloomberg News.

Attorney General Andrew Cuomo wants investment banks to  create auction rate securities buyback programs for retail customers, reimburse consumers forced to sell off their securities at “below par” prices, and institute a claims resolution mechanism.

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