Citigroup to buy back $7 billion of auction-rate debt

August 7, 2008 by · Leave a Comment
Filed under: Industry News 

Looks like this story is getting more interesting.  With the amount of movement we have seen in the past week on this story it looks like their was some sort of fraud or misrepresentation that happened in the action-rate debt market.  If you have not been reading on this, many states, cities, municipalities and school districts to name a few have been hurt by little catches in their contracts with investment banks on this type of debt.

The fine print read that is these types of auctions failed to bring buyers then you could see a 20%+ increase in the rates you have to pay to float this type of debt on the market.  The market itself was very liquid for some time so no one really paid that catch much thought until late 2007 when the market froze and these contracts sprung into action.  Here is the Reuters release.


Citigroup Inc agreed to buy back more than $7 billion of illiquid auction-rate securities and pay a $100 million civil fine to settle charges it marketed the debt fraudulently.

The settlement with New York Attorney General Andrew Cuomo and the U.S. Securities and Exchange Commission could pave the way for other settlements stemming from February’s meltdown of the $330 billion auction-rate market, which boosted borrowing costs for state and local governments, hurting taxpayers.

It will also hinder Citigroup Chief Executive Vikram Pandit’s efforts to slash costs and restore the bank’s profitability following $17.4 billion of losses in the last three quarters.

“It’s really a face-saving attempt,” said Brian Yelvington, an analyst at CreditSights Inc in New York. “If Citi is able to pull this off, the other banks that have sponsored these programs could be under pressure to do something similar.”

Thursday’s settlement calls for New York-based Citigroup to buy back all illiquid auction-rate debt at face value from retail customers, charities and small- to mid-sized businesses — a total of some 40,000 customers nationwide — by November 5.

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