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WASHINGTON : The US state of Massachusetts said Thursday it had reached a settlement with Merrill Lynch under which the investment bank agreed to buy back stressed securities from investors.
The settlement was announced by the office of Massachusetts secretary of the commonwealth Francis Galvin after the state filed a lawsuit against Merrill Lynch in July claiming it had misled clients in the marketing of so-called auction rate securities.
"The settlement will provide thousands of Merrill Lynch clients with access to billions of dollars in funds that have been frozen in the ARS market," Galvin's office said in a statement.
The July lawsuit alleged that Merrill had improperly marketed the securities because it assured clients they were liquid, money-market instruments almost as accessible as cash.
Auction rate securities are not liquid and can be difficult to redeem if investors opts to cash them in. The ARS market collapsed in February leaving investors with substantial losses as the credit crunch worsened its grip on US financial markets.
Merrill's pact with Massachusetts comes after the bank announced earlier this month in a voluntary action that it would repurchase 12 billion dollars' worth of securities it had marketed.
Galvin's office said Merrill had agreed to initially buy back 2.1 billion dollars' worth of the stressed securities from retail customers, including small businesses and charities, who have less than three million dollars on deposit.
Under a second component to the settlement, Merrill will start repurchasing further securities from January of next year.
Auction rate securities, essentially debt instruments issued by financial firms, municipalities and student loan companies, typically have a fairly lengthy maturity. But the interest rates on such securities can be volatile and change at auctions run by the banks.
They provided a rich business for many banks prior to the market's collapse in February.
- AFP /ls
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