Morgan Stanley joins Citigroup, UBS and Merrill in buying back auction-rate securities

12 August 2008

Morgan Stanley said late Monday that it would offer to buy back up to $4.5 billion of auction-rate securities from retail clients, following similar announcements from rivals including Citigroup, Merrill Lynch and UBS AG.

Morgan Stanley's offer came shortly after New York Attorney General Andrew Cuomo sent letters to the company as well as to JPMorgan Chase and Wachovia Corp with regard to his office's ongoing investigation into the collapse of the $330 billion auction-rate securities market last February.

Last week, Cuomo's office and the Securities and Exchange Commission reached settlements that forced 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. (See: UBS follows Citigroup to settle auction securities fraud and Citigroup to settle with authorities on securities fraud)

Auction-rate securities are debt investments issued by municipalities, student-loan agencies, closed-end funds and others, with interest rates that are reset at weekly or monthly auctions run by the investment firms.

In a letter to Wachovia, Cuomo's office says it would like to "enter into immediate talks about resolving the investigation, as that would be in the best interests of both consumers nationwide, as well as Wachovia customers." The letter says any resolution would have to address the same concerns as those in last week's settlement.

Bank of America and its subsidiaries have received subpoenas and requests for information from state and federal governmental agencies on auction-rate securities. It faces several class-action lawsuits contending it misled investors about the nature of the securities and their market.

Morgan Stanley said its buyback offer would start before 30 September and last until 30 November. It covers retail clients - individuals, charities and small to medium-sized businesses with accounts of $10 million or less - who bought auction rate securities through the firm before 13 February.