Merrill and Citigroup buy back toxic debt

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Merrill Lynch joined Citigroup in saying it would buy back auction-rate securities from retail clients.

Bank of America faces enquiries about its role in the affair and Credit Suisse is being sued by one of its clients over the toxic debt.

The settlement piles pressure on Swiss bank UBS, which US authorities say was leader in the practice, which they regard as a massive fraud on its customers.

Citigroup has agreed to buy back about $7.5 billion (£3.82 billion) of the debt and pay a $100 million fine, as part of settlements with New York attorney general Andrew Cuomo and the Securities and exchange Commission.

It will buy back auction-rate debt from about 40,000 retail customers, charities and small or mid-sized businesses by November and fully reimburse retail investors who sold the debt at a loss.

Merrill followed suit with a pledge to buy back up to $12 billion in the debt that is saddling its customers.

The $330 billion auction-rate securities market went into meltdown in February. The long-term paper was issued by institutions such as municipalities, studentloan companies and mutual funds, and interest rates were set through weekly or monthly auctions. But with the subprime crisis, there were no takers in the market, leaving investors with securities they could not sell.

The current round of settlement was set off by legal action from Cuomo against UBS. he says UBS steered 50,000 customers across the US into the securities just before the market fell apart.

At least seven UBS executives dumped $21 million in auction-rate securities that they held in personal accounts as the credit market began to crash, the state says. "Top executives jumped ship as soon the securities market started to collapse, leaving thousands of customers holding the bag," Cuomo said.

Victims included tens of thousands of individual investors and 250 companies. UBS denies the claims and says it will defend itself "vigorously".

The big payout to buy back the securities at face value will hinder efforts by Citigroup chief executive Vikram Pandit to cut costs. It is said to be heading for a loss of some $500 million.