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Posted: Monday, Aug. 11, 2008

Missouri talking with Wachovia on settlement

By Rick Rothacker
Published in: Banking

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Missouri is negotiating with Wachovia Corp. to settle an investigation into its sale of $9.5 billion in auction-rate securities.

In a filing today, the Charlotte bank said it has set aside an extra $500 million to cover the cost of a settlement, including losses tied to the value of auction-rate securities. Previous auction-rate securities settlements have required banks to buy securities back from customers as well as pay fines.

Missouri Secretary of State Robin Carnahan said in a statement that she is meeting with Wachovia executives this week “to discuss a solution for investors holding auction rate securities.” The negotiations began on Friday and continued through the weekend.

“Friday’s meeting was productive and we made progress towards an agreement that will ensure investors have access to their money,” Carnahan said in a statement. “I am pleased with the effort that Wachovia has made and I look forward to working together this week. Investors should be able to access their money as promised, and I am committed to finding a solution that will make them whole as quickly as possible.”

Auction-rate securities are bonds with interest rates that reset periodically that can be issued by municipalities, hospitals, student-loan companies and other special entities. They were once seen as a safe investment, but the market crashed in February when banks stopped submitting bids that rest the interest rates amid the credit crunch.

Investors have been left holding bonds they can’t sell, meaning they couldn’t access their principal. Regulators are investigating whether banks misled customers about the risk of these investments. Cuomo reached settlements last week that required UBS and Citigroup to buy back more than $20 billion in securities from investors.

Missouri is the lead state in a national task force investigating Wachovia’s sales practices of auction rate securities. The investigation began in April and included a visit last month to Wachovia Securities offices in St. Louis in which investigators sought documents and records related to the sale of such bonds.

Wachovia spokesman Christy Phillips-Brown confirmed the bank is meeting with regulators in Jefferson City, Mo.

The talks came the same day that New York Attorney General Andrew Cuomo said he is expanding his investigation into the troubled auction-rates securities market to Wachovia, JPMorgan Chase & Co. and Morgan Stanley & Co. Laura Egerdal, a spokeswoman for the Missouri Secretary of State, said Missouri is coordinating the investigation with Cuomo and other states.

The goal is to get an agreement “as soon as possible,” Engerdal said.

Wachovia in May said it had received inquiries and subpoenas from the Securities and Exchange Commission and several state regulators over auction-rate securities. Bank of America Corp., also based in Charlotte, said in a filing last week that it has "received subpoenas and requests for information from various state and federal governmental agencies" over auction-rate securities.

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