Auction Rate Securities = Bank Desperation

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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.”