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Bank of America Strikes Deal to Buy Back Auction Rate Securities

Sep 10, 2008 | Parker Waichman Alonso LLP

Bank of America has reached an agreement with Massachusetts state regulators to buy back $4.8 billion worth of auction rate securities.  The Bank of America settlement covers all illiquid auction rate securities sold to retail customers nationwide, as well as those purchased by some small business owners and charitable organizations.

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 earlier this year. 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.  Last month, UBS AG, Citigroup Inc., J.P. Morgan Chase & Co., Morgan Stanley, Merrill Lynch & Co. and Wachovia Corp.  all reached settlements with regulators, and  agreed to buy back more than $40 billion of auction-rate securities from their clients.

The latest agreement to buy back auction rate securities was announced this morning by Massachusetts Secretary of the Commonwealth William Galvin.  Bank of America, which didn’t admit any wrongdoing, said it will repurchase about $4.5 billion in securities, while Galvin’s office said the number is actually about $4.8 billion.  This latest  agreement was announced just two weeks after Massachusetts said Bank of America agreed to buy back $43 million of the securities from the commonwealth's government agencies.

According to The Wall Street Journal, Bank of America will offer to buy back during the fourth quarter all illiquid auction-rate securities at par value from all retail customers nationwide, as well as small-business customers with up to $10 million in deposits and charitable-entity customers with up to $25 million in deposits.