Wachovia plans to buy back nearly $9 billion in auction-rate debt, settling federal and state probes and making it the fifth major bank this month to agree to help stabilize the debt market.
Wachovia , the fourth-largest U.S. bank, agreed to repurchase auction-rate securities totaling $8.8 billion, including $5.7 billion in securities held by over 40,000 individual investors, charities and small businesses.
The $330 billion auction-rate securities market normally allows issuers to borrow money for the long term, but at lower, short-term rates.
But demand at the daily auctions for the securities faded earlier this year amid a broader flight from risky investments, leaving their owners unable to redeem them for cash.
Regulators say Wachovia and other banks misled investors into believing that auction-rate debt, which has rates that reset in periodic auctions, was the equivalent of cash.
"They marketed things to investors making specific representation about liquidity but failing to disclose to them that there were potential risks out there in the marketplace that might affect their ability to actually provide the liquidity they claimed was available,'' said Merri Jo Gillette, director for the SEC regional office in Chicago.
Wachovia CEO Robert Steel blamed "unprecedented market conditions'' for the problems and said the company was happy to resolve the matter.
Merrill Lynchalso offered to buy back as much as $12 billion of the debtbut has not settled with regulators. New York Attorney General Andrew Cuomo said Friday the state plans to take legal action to force a deal.
On Thursday, Morgan Stanley agreed to buy back $4.5 billion in debt and pay a $35 million fine, and JPMorgan Chase agreed to buy back $3 billion and pay a $25 million fine.
That followed deals last week in which Citigroup and Swiss bank UBS agreed to buy back a combined $26 billion of the debt, and pay $250 million in fines.
$50 Million Fine, No-Interest Loans
Wachovia's initial buyback is slated for Nov. 10 through Nov. 28. Wachovia will offer to repurchase $3.1 billion between June 10 and June 30, 2009, according to securities regulators.
Wachovia will also pay a $50 million dollar fine, and will make no-interest loans available immediately for investors who need liquidity before the buyouts are completed, said Missouri Secretary of State Robin Carnahan, who led the probe into Wachovia.
Wachovia also agreed to participate in a special arbitration process for investors who suffered a loss or damages due to an inability to access their money. It also pledged to reimburse investors who sold their auction-rate securities for an amount below par after the meltdown.
The auction-rate securities were sold through Wachovia Capital Markets and Wachovia Securities , which was known as before Wachovia acquired it in October 2007.
The settlement comes after securities regulators from Missouri and several other states mounted a surprise inspection at the St. Louis headquarters of Wachovia Securities last month amid complaints from customers about frozen investments and a lack of cooperation from Wachovia.
Securities and Exchange Commission officials said Wachovia could face additional penalties depending on its settlement performance.
Wachovia shares were down 21 cents to $15.60 in late trading.