Merrill, Goldman and Deutsche settle auction-rate probe

From Times staff writer Walter Hamilton:

Three more big investment banks today joined the list of firms making amends with customers over auction-rate securities.

Merrill Lynch & Co., Goldman Sachs Group and Deutsche Bank agreed this afternoon to legal settlements requiring them to repurchase more than $10 billion in frozen auction-rate issues held mostly by small investors. The firms also will pay fines totaling $162.5 million.

Investigations by regulators led by New York Atty. Gen. Andrew Cuomo have focused on whether the companies foisted the securities on investors as the auction-rate market was seizing up early this year, amid the deepening credit crunch.

Combined with earlier pacts with five other firms, major brokerages now have agreed to reimburse about $50 billion of the roughly $60 billion in auction-rate securities that Cuomo’s office estimates were held by individuals. Companies and institutional investors also have been stuck in the debt.

"It’s been a great day of progress," Cuomo said in a conference call with reporters.

Earlier, he and other regulators made clear their probe now was heading "downstream" -- meaning to smaller brokerages nationwide that sold the debt.

Auction-rate securities are long-term debt instruments that were designed to trade like short-term securities. They were pitched by brokers to small investors as safe and easily redeemable. But since the market collapsed in February, investors have been stranded in the issues, unable to sell.

Brokerages balked at using their own funds to redeem the debt until Cuomo and other regulators went after them.

Cuomo estimated that Merrill’s buyback would total $10 billion to $12 billion. The purchases will begin Oct. 1. The firm had previously offered to buy back the debt but wanted to wait until January to begin.

The Merrill settlement, which includes a fine of $125 million, was a case of high-stakes brinksmanship. Cuomo threatened early in the day to sue Merrill within 24 hours if the company refused to strike a deal. The pact was reached when Merrill’s CEO, John Thain, took the rare step of personally meeting with Cuomo and with Karen Tyler, president of the North American Securities Admininstrators Assn.

"We are pleased our clients have the certainty of a favorable resolution to this unprecedented liquidity crisis," Thain said in a statement.

Goldman will repurchase about $1.5 billion of securities and pay a $22.5-million fine. Deutsche Bank will take back $1 billion of securities and pay a $15-million penalty.

Photos: New York Atty. Gen. Andrew Cuomo (top) by Gino Domenico / Bloomberg News; Merrill Lynch CEO John Thain (bottom) by Gautam Singh / Associated Press