After protracted negotiations, Bank of America Corp. on Wednesday agreed to buy back $4.8 billion in troubled securities held by its customers, becoming the latest bank to settle with regulators.
In a pact with Massachusetts securities regulators, the Charlotte bank will purchase auction-rate securities held by retail investors, small businesses and charitable organizations nationwide. The Securities and Exchange Commission on Wednesday also said it was close to resolving its probe.
The banking giant is one of many financial institutions to come under scrutiny for the sale of a type of bond with resetting interest rates. The market for auction-rate securities froze in February amid the credit crunch, leaving individual and institutional investors unable to access their money.
Massachusetts Secretary of the Commonwealth William Galvin said his investigation was spurred by a wave of consumer complaints after the market's collapse. The state's inquiry found that Bank of America sold the securities as safe, liquid and money-market-like and that customers were not aware of the increasing risk they faced. Other banks faced similar allegations.
The deal covers all the securities that retail and certain small business and charitable investors haven't been able to sell. Bank of America, which neither admitted nor denied wrongdoing, said the offer will cover about 5,500 customers.
The bank said it continues to cooperate with investigations by the SEC and the New York attorney general's office. As the probes intensified last week, the bank said it was ready to settle and that it had thought it had an agreement weeks earlier. The bank said the Massachusetts settlement didn't come with a fine.
Bank of America said it expects to take a pretax charge of about $275 million in connection with the purchase of the securities from retail clients. This mostly stems from the difference between the purchase price and the estimated value of the securities.
Last month, Charlotte-based Wachovia Corp. agreed to buy back up to $8.8 billion in auction-rate securities to settle an investigation involving the Missouri secretary of state, New York Attorney General Andrew Cuomo and the Securities and Exchange Commission. Wachovia, which neither admitted nor denied wrongdoing, also agreed to pay $50 million in fines and could face SEC penalties depending on the success of the buyback program.
Citigroup Inc., UBS, JPMorgan Chase & Co. and Morgan Stanley & Co. also have settled with regulators.
Auction-rate securities are bonds with interest rates that reset periodically. They can be issued by municipalities, hospitals and other entities. Banks and brokerage firms package them to sell to the public, and they can also submit the bids that reset the interest rates. If there are not enough bids to cover the securities for sale, then the auction fails and the investors cannot access their principal.