JPMorgan Chase & Co. and Morgan Stanley on Thursday became the latest banks to reach settlements with New York Attorney General Andrew Cuomo and other regulators as part of an investigation into the collapse of the auction-rate securities market.
The pair of banks will repurchase a combined $7 billion in the troubled securities at face value from investors. Morgan Stanley agreed to pay a fine of $35 million, while JPMorgan will pay a fine of $25 million.
JPMorgan and Morgan Stanley are the third and fourth to reach settlements, following deals by UBS AG and Citigroup Inc. last week. Regulators continue to investigate other banks as well, including Charlotte's Wachovia Corp. and Bank of America Corp.
Wachovia has been in talks this week with regulators coordinated by the Missouri secretary of state.
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“We continue to be in active discussions and look forward to a resolution soon,” Wachovia spokeswoman Christy Phillips-Brown said.
Cuomo's office, the Securities and Exchange Commission and other state regulators reached settlements that required Swiss bank UBS to repurchase $18.6 billion in the securities, while Citigroup agreed to buy back $7 billion of the securities. UBS will also pay a fine of $150 million, while Citigroup will pay a $100 million fine.
The $330 billion auction-rate securities market involved investors buying and selling instruments that resembled corporate debt, except the interest rates were reset at regular auctions, some as frequently as once a week. A number of companies and retail clients invested in the securities because they could treat their holdings almost like cash.
The bond-like investments were widely held by many institutional and individual investors and were seen as highly liquid, money market-like investments. However, the market for them collapsed in February amid the downturn in the broader credit markets.
Regulators have been investigating the collapse in the market to determine who was responsible for its demise and whether banks knowingly misrepresented the safety of the securities when selling them to investors.
Like last week's settlements, JPMorgan and Morgan Stanley agreed to repurchase the securities, and will reimburse customers who sold at a loss after the February market collapse.
JPMorgan will repurchase $3 billion in auction-rate securities sold to about 10,000 customers by Nov. 12. Morgan Stanley will repurchase $4 billion in securities sold to 20,000 customers by Dec. 11.