Auction Rate Securities = Bank Desperation

Wow, this keeps getting more and more interesting by the minute.  The latest in the mortgage market meltdown is the news that Citigroup and now UBS will buy back a combined $32 billion worth of auction rate securities that were sold fraudulently.  This is just another blow for cash-strapped mega-banks that have gone to great lengths to raise and maintain capital in this credit crunch.

Billion-dollar buybacks sure don’t help.  Shareholders rejoice! Not really.

From Bloomberg:

UBS AG, Switzerland’s biggest bank, may pay more than Citigroup Inc. or Merrill Lynch & Co. to settle state and federal claims that it fraudulently sold auction-rate securities, a person briefed on the negotiations said.

UBS is close to resolving those claims and may make a promise to retail and institutional clients to buy back the securities, valued at $25 billion by regulators, the person said. Merrill Lynch offered yesterday to buy back about $10 billion in auction-rate securities from individual investors, claiming that was the amount its customers held.

Citigroup agreed yesterday to buy back $7.3 billion of the debt from individual investors to settle state and federal regulators’ claims and to pay $100 million in fines, setting a framework for talks with other banks including UBS. Citigroup also promised to help institutional customers unload another $12 billion in the securities.

“We reach settlements that are appropriate for the circumstance,” New York State Attorney General Andrew Cuomo said yesterday at a press conference announcing the deal with New York-based Citigroup, the largest U.S. bank by assets, that also requires it to help more than 2,600 institutional investors unload $12 billion of the securities. “UBS would be a different circumstance.”

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