Citigroup Inc., which is advising Jefferson County on how to pay off $3.2 billion in sewer bonds, agreed Thursday to settle claims it improperly saddled its own customers with untradeable bonds.
The New York-based company agreed to pay a $100 million fine and buy back or help clients unload $19.5 billion in auction-rate securities to settle regulatory claims.
Citigroup will buy back about $7.5 billion in securities from individual customers, charities and small businesses under a settlement with New York State Attorney General Andrew Cuomo, the Securities and Exchange Commission and a group of states led by Texas.
Auction-rate securities are bonds whose interest rates are reset by periodic bidding run by dealers. Firms including Citigroup abandoned their routine role as buyers of last resort for the debt in mid-February as demand dried up, allowing the market to collapse and leaving investors stuck in what had been pitched to them as money-market-like instruments.
That is what led to Jefferson County hanging on the brink of the largest municipal bankruptcy in U.S. history. The county has about $3 billion of variable-rate debt, including $2.2 billion in auction-rate securities that were attracting no bidders.
Because the auctions dried up, interest rates the county was paying bondholders more than tripled, some to 10 percent. It cost the county an extra $700,000 a week in interest payments, and led to the current forbearance agreements that are keeping the county from formally defaulting on the money it borrowed to expand and repair the sewer system.
Citigroup had no role in devising or underwriting Jefferson County's sewer bonds. The New York firm was hired last month to advise the county on a rescue plan.
Jefferson County Commission President Bettye Fine Collins said Thursday that Citigroup isn't the only Wall Street firm facing troubles because of auction securities. Merrill Lynch & Co., which served as county's adviser before Citigroup, also has its share of problems, she said.
No comments:
Post a Comment