Merrill Agrees to Buy Back 10 Billion in Illiquid Auction Rate Securities (Starting in 2009)

So who is picking up this tab on behalf of the taxpayers, Ben or Hank?

Merrill Lynch To Buy Auction Rate Securities Positions From Its Retail Clients

NEW YORK, August 7, 2008 - Merrill Lynch today announced that effective January 15, 2009 and through January 15, 2010 it will offer to buy at par auction rate securities sold by it to its retail clients.

"Our clients have been caught in an unprecedented liquidity crisis," said John A. Thain, chairman and chief executive officer. "We are solving it by giving them the option of selling their positions to us."

"We have made tremendous strides in working with issuers during the last five months; over 40% of our clients' auction rate holdings have been liquidated," said president of Global Wealth Management Robert J. McCann. "But we are not satisfied with this pace, even though the marketplace continues to move forward and we expect issuer redemptions to accelerate with time. With this offer, we continue to put the interests of our clients first."

Merrill Lynch acknowledges the important role being played by the SEC, New York State Attorney General Cuomo, the Massachusetts Securities Division and the North American Securities Administrators Association on these issues. Merrill Lynch also will continue to work closely with and encourage auction rate securities issuers in their restructuring efforts to resolve the outstanding liquidity issues for all of Merrill Lynch's retail and institutional clients.

Merrill Lynch's action creates liquidity for more than 30,000 clients who hold municipal, closed-end funds and student loan auction rate securities. Merrill Lynch retail clients currently hold an estimated $12 billion in auction rate securities, which Merrill Lynch expects to be reduced to under $10 billion by January 2009 as a result of announced and anticipated issuer redemptions. In addition to its offer to buy auction rate securities, Merrill Lynch will continue to actively provide clients with attractive loan arrangements to give them needed liquidity.

Under the plan announced today, retail clients of Merrill Lynch would have a year, beginning on January 15, 2009 and ending January 15, 2010, in which to sell Merrill Lynch their auction rate securities, if they so wish. Retail clients include individuals, charitable institutions and many family-owned and small businesses. Auction rate securities that are the subject of pending issuer redemptions or successful auctions will not be eligible for purchase by Merrill Lynch.

The auction rate securities that are owned by Merrill Lynch's clients are predominantly rated AAA and are not credit-impaired. Merrill Lynch does not expect its purchase of auction rate securities in 2009 through 2010 to have a materially adverse impact on its capital ratios, liquidity, or consolidated financial performance.

CITI Agrees to Pay Fines and Buy Back 7 Billion in Illiquid Misrepresented Securities

The AP headline below makes Citi sound like Saint Nicholas or Robin Hood doesn't it? Citi was caught with their hands in the cookie jar making consciously false claims for securites which they wished to unload on the public, and then attempting to obstruct justice by destroying evidence. They made their plea bargain to avoid the discovery process and criminal prosecution.

Look for all the other big banks involved to plead out as well. This was once again driven by the States attorney-generals. We wonder if Bernanke will be exchanging these auction rate securites for US Treasuries at par for Citi at the special customers window?

The wristslaps will continue until the victims wake up and do something or are bankrupt, whichever comes first.

AP
Citigroup returning billions to investors
Thursday August 7, 12:05 pm ET

Citigroup returning billions to investors, paying fine in deals over auction securities

WASHINGTON (AP) -- Citigroup Inc. will buy back more than $7 billion in auction-rate securities and pay $100 million in fines as part of settlements with federal and state regulators announced Thursday.

Citigroup will buy back the securities from tens of thousands of investors nationwide under separate accords with the Securities and Exchange Commission, New York Attorney General Andrew Cuomo and other state regulators. The buybacks will have to be completed by November.

The nation's largest financial institution also will pay a $50 million civil penalty to New York state and a separate $50 million civil penalty to the North American Securities Administrators Association, which represents securities regulators in the 50 states and the District of Columbia.

The SEC also will consider levying a fine on Citigroup, the agency's enforcement director Linda Thomsen, said at a news conference. (Smaller than a wristslap and perhaps not bigger than a parking ticket. Financial crime pays at the Federal level. - Jesse)

New York-based Citigroup neither admitted nor denied wrongdoing under the settlements.

Cuomo had threatened to charge Citigroup with fraudulent sales of auction-rate securities and with the destruction of key documents. (Citi once again avoids discovery - Jesse)

The $330 billion auction-rate securities market involves investors buying and selling securities backed by municipal bonds, student loans and other debt. The market collapsed in February amid turmoil in the credit markets.

"More than 50 percent of our retail clients' holdings in (auction-rate securities) have been redeemed or auctioned at par since the crisis began," Citigroup said in a statement. "We remain committed to continuing our work on initiatives that will secure the best and fastest route to providing liquidity to our clients."

The federal and state regulators have been investigating marketing of the securities by a number of big banks.

Cuomo's office sued the Swiss bank UBS AG last month over billions of dollars in sales in auction-rate securities, and states including Massachusetts and Texas have filed similar complaints. Massachusetts last week accused Merrill Lynch of fraud in promoting the sale of auction-rate securities.

Interest rates on the securities are set at periodic auctions, on the basis of bids submitted.

Charts in the Babson Style for MIdweek 6 August 2008

Reserves? We Don't Need No Stinking Reserves!

The credit crisis was caused by a long period of negative short term interest rates, excessive money supply growth, reckless credit expansion, insufficient reserves and over leverage. The regulatory process became hopelessly ineffective and co-opted. Key safeguards that had been in place since the 1930's were brought down through conscious and well-funded lobbying.

The banks think that they have established the principle that if they overborrow enough, if they are reckless enough, if they expand enough, they become "too big to fail" and their losses will be borne by the taxpayers and all holders of the currency, while they keep their personal profits and bonuses.

The Fed would like to introduce some 'turbo-charging' to that money-printing machine, cry 'Fiat!' and unleash the dogs of leveraged credit expansion and monetary inflation. The final link will be a directly funding capability between the Treasury and the Fed, which although not legal is not yet technically sanctioned by the US Uniform Code of Law. But if the Treasury can monetize debt directly such as in the Paulson plan for Fannie and Freddie purchases that point may be moot for quite some time. This is going to be interesting.


Divorcing Money from Monetary Policy
Authors: Todd Keister, Antoine Martin,and James McAndrews
New York Federal Reserve

Many central banks implement monetary policy in a way that maintains a tight link between the stock of money and the short-term interest rate. These procedures require the central bank to set the supply of reserve balances precisely in order to implement the target interest rate.

Because reserves play other important roles in the economy, the link can create tensions with other objectives of central banks. For example:

The imbalance between the intraday need for reserves for payment purposes and the overnight demand leads central banks to provide low-cost intraday loans of reserves to participants in their payments systems, exposing central banks to credit risk and potential moral hazard problems. (This is like worrying about having dirty dishes in the sink while hauling toxic sludge into the house by the truckload, if one considers the dodgy debt the Fed is bringing in from the investment banks through Special Facilities. As for their concerns about moral hazard, these financial swingers have the moral sensibilities of a billy goat. - Jesse)

The link between money and monetary policy prevents central banks from increasing the supply of reserves to promote market liquidity in times of financial stress without compromising their monetary policy objectives. (This is the issue, the punchline. The bank wants to be able to flood the market with liquidity at will without it showing up in the short term interest rates and money supply figures. Since they have eliminated M3 that takes care of the top end. They basically would like to free themselves from even nominal restraints on printing money. - Jesse)

The link also relies on banks facing an opportunity cost of holding excess reserves, which leads them to expend effort to avoid holding these reserves and thereby makes the monetary system less efficient. (Yes we have seen the high efficiency that has been gained recently by insufficiently low reserves and high gearing of leverage. Let's increase it now that we think the worst has past to see if we can get lucky again - Jesse)

Keister, Martin, and McAndrews consider an alternative approach to monetary policy implementation—a “floor system”—that can eliminate these tensions by “divorcing” the central bank’s quantity of reserves from its interest rate target.

By paying interest on reserve balances at its target interest rate, a central bank can increase the supply of reserves without driving market interest rates below the target.

The authors explain that a floor system allows a central bank to set the supply of reserve balances according to the payment or liquidity needs of financial markets. By removing the opportunity cost of holding reserves, the system also encourages the efficient allocation of resources in the economy.

A version of the floor system was recently adopted by the Reserve Bank of New Zealand; this option for monetary policy implementation will be available to the Federal Reserve beginning in 2011.

Divorcing Money from Monetary Policy - NY Fed - pdf download