RBC in talks to buy back auction-rate securities: report
Royal Bank of Canada is in talks with New York Attorney General Andrew Cuomo over a possible deal to buy back as much as $1 billion in specialized securities that the Canadian bank sold to investors, according to the Globe and Mail.
The Globe cited an internal RBC memo as stating that the bank was discussing with New York state how to structure the repurchase of the approximately $1 billion in so-called auction-rate securities that retail investors bought in the last couple of years.
RBC's total financial exposure is $4.9 billion in an auction-rate market worth more than $330 billion.
RBC is in talks with New York to settle an auction-rate securities investigation.(CBC)State regulators, however, have been pressuring financial institutions to buy back only that portion of their auction-rate securities sold to retail investors, generally considered to be smaller scale purchasers.
For its part, RBC flogged approximately 25 per cent of its total auction-rate portfolio to these smaller players.
One analyst estimated that the bank would take a monetary writedown on its balance statement of approximately $100 million to cover its entire auction-rate portfolio.
And RBC already wrote down its student loan auction-rate securities in the second quarter, absorbing a $184-million financial shock.
The bank said it will not talk about any negotiations.
"We have no comment other than to say that we are committed to addressing the problem of retail clients who hold auction-rate securities," said RBC spokesperson Jackie Braden.
Other firms settleThe Globe's report came one day after New York state announced that it had reach a deal with a number of U.S. financial institutions concerning the sale of the same type of securities.
Merrill Lynch & Co., Goldman Sachs Group Inc. and Deutsche Bank this week all agreed to buy back a large portion of their auction-rate securities and pay fines related to their roles in selling risky auction-rate securities to investors.
Under the agreement, Cuomo said Thursday, Merrill Lynch will buy back roughly $10 billion US to $12 billion of the investments and pay a fine of $125 million.
Deutsche Bank, which must buy back about $1 billion in auction-rate securities, has been fined $15 million. Goldman Sachs has $22.5 billion of the securities to buy back, and was fined $1.5 billion.
Cuomo and other regulators previously reached $42 billion worth of settlements with five major Wall Street banks, including Citigroup Inc. and Switzerland's UBS AG. The attorney general threatened earlier Thursday to sue Merrill Lynch if an agreement were not reached by the end of the day.
Auction market collapseThe investigations are examining how brokerages sold auction-rate securities before the market collapsed in February. Federal and state authorities believe banks pitched the investments as safe.
Who has settled already Commerce Bank - $545M US Wachovia Corp. - up to $9B UBS - $22B Goldman Sachs - $22.5BCuomo said earlier Thursday he wanted the investment bank to buy back the securities within a set period of time, and to also pay fines for having pitched them as safe investments to customers.
Also Thursday, Massachusetts Secretary of State William Galvin said Merrill Lynch has agreed to settle a similar dispute.
Galvin, who is the top securities regulator in Massachusetts, said the agreement calls for Merrill to buy back all illiquid auction-rate securities from investors who have less than $3 million on deposit.
In addition, Galvin said, Merrill has agreed to buy back auction-rate securities from investors with deposits on account of $100 million or less after Jan. 15. Massachusetts filed its enforcement action on July 31.
The auction-rate securities market involved investors buying and selling instruments that resembled corporate debt, but the interest rates on the investments were reset at regular auctions, some as frequently as once a week. A number of companies and retail clients invested in the securities because they could treat their holdings almost like cash.
But the market for them collapsed in February amid the downturn in the broader credit markets.
Regulators have been investigating the collapse in the market to determine who was responsible for its demise and whether banks knowingly misrepresented the safety of the securities when selling them to investors.
With files from the Associated Press
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