Wachovia Corp., the fourth-largest U.S. bank, agreed to buy back $9 billion of frozen auction-rate securities and pay a $50 million fine to settle state and federal claims that it misled investors about the debt.
Wachovia will repurchase the securities, including $5.7 billion from individuals, charities and small businesses, under a settlement with a group of states led by Missouri and the U.S. Securities and Exchange Commission. The accord follows similar settlements from banks including UBS AG and Citigroup Inc. and brings to more than $50 billion the amount of buybacks offered.
“Today’s agreement in principle underscores our desire to ensure that clients who purchased ARS at Wachovia receive the liquidity they need,” Wachovia Chief Executive Robert Steel said. The Wachovia accord covers more than 40,000 investors, Missouri Secretary of State Robin Carnahan said.
Wachovia is the fifth bank in the past two weeks to settle with regulators in a nationwide investigation of how auction- rate securities were marketed. The agreement puts pressure on Merrill Lynch & Co. and other firms still negotiating with regulators over the securities, which were advertised as safe as cash until the $330 billion market collapsed.
Wachovia will take a $275 million pre-tax charge because of higher legal costs in the third quarter, after taking a similar $500 million write-down in the second quarter.
Wachovia “didn’t have any choice,” said Gary Townsend, a former bank analyst and co-founder of Hill-Townsend Capital Management in Chevy Chase. “When everyone else is settling, there is no place to hide.”
Auction-rate securities are typically bonds with interest rates reset by periodic bidding. Banks and securities dealers that ran the auctions abandoned their routine role as buyers of last resort in mid-February, allowing the market to implode.
Wachovia lost 24 cents to close at $15.57 in New York Stock Exchange trading. Its shares have declined 59 percent this year.