Bank of America Corp. will buy back up to $4.7 billion worth of supposedly safe bonds sold to small investors, according to a preliminary agreement with regulators announced Wednesday.
The Charlotte bank had reached a similar agreement with Massachusetts regulators last month. Wednesday's settlement – reached with the Securities and Exchange Commission, the New York Attorney General's Office and the North American Securities Administrators Association – could be the last of the bank's settlements over the investments, called auction-rate securities.
Bank of America neither admitted nor denied wrongdoing. It will buy back the investments that it sold to about 5,500 individuals, small businesses and small charities. It will also pay a $50 million penalty to regulators, and could face additional penalties from the SEC depending on the success of its buy-back program.
At least a dozen large financial institutions, including Wachovia Corp., Citigroup Inc., Morgan Stanley, JPMorgan Chase & Co. and Goldman Sachs Group Inc., have reached similar settlements. In all, they have agreed to buy back more than $50 billion in auction-rate securities from smaller investors.
The securities are bonds with interest rates that reset periodically – usually every seven, 28 or 35 days. Some financial advisers say they were viewed as safe and stable for years, but that ended abruptly in February when banks got spooked by the credit crunch and stopped submitting the bids that reset those rates. As a result, the auctions failed and most investors were unable to sell their bonds, meaning they couldn't access their principal.
Regulators stepped in because they say banks had misled investors, telling them that the bonds were as liquid as cash.
Bank of America will buy the securities at their face value, and will reimburse any investors who sold their securities at a loss since February. The buy-back offer will remain open until Dec. 1, 2009.
The bank said Monday that it took a loss of $313 million on buying back auction-rate securities in the third quarter.
The bank noted that the multi-party settlement Wednesday “closely mirrors” a settlement announced Sept. 10 with the Massachusetts Secretary of the Commonwealth. That also was built around the $4 billion-plus buy-back program.
Customers can call 866-638-4183 or visit www.bankofamerica.com and select “Investment Services” for information on the buy-back program.