By Aline van Duyn in New York
Published: August 21 2008 03:00 Last updated: August 21 2008 03:00
Bank of America, Deutsche Bank and Goldman Sachs are being investigated by Andrew Cuomo, the New York attorney-general, as part of his investigation into the selling of auction-rate securities.
Already, Wall Street firms have agreed to buy back nearly $50bn of the securities sold to retail investors, in one of the biggest examples of a bail-out of small investors by large financing groups.
Citigroup, JPMorgan, Merrill Lynch, Morgan Stanley and UBS have agreed to buy back securities at their full value, even though much of this debt is now trading at a discount. Most institutional investors are not covered by the agreements.
As well as underwriters of auction-rate debt, which collapsed in February after Wall Street dealers withdrew their support for the debt sales, Mr Cuomo said that he was still investigating the role of brokerages that sold the securities, such as Fidelity, Charles Schwab, TD Ameritrade, E*Trade Financial and Oppenheimer.
A spokesman said that the investigation's attention had now turned to Bank of America, Deutsche and Goldman Sachs.
This week, members of the Regional Bond Dealers Association asked Mr Cuomo to ensure that the settlements agreed with the Wall Street companies that underwrote many of the securities also applied to investors who bought auction-rate securities from smaller intermediaries, called downstream brokerages.
Mr Cuomo's office replied yesterday in a letter that his investigation "has already begun to uncover some disturbing facts that seem to belie the innocent picture of downstream brokerages you paint".
"If downstream brokerages deliberately stuck their heads in the sand but continued to actively market these products to unknowing investors, that will certainly be relevant to our calculus of the firms' culpability," the letter continued.
The auction-rate securities market was used for many years by municipalities, student loan providers and funds to access the large numbers of investors seeking short-term investments or an alternative to cash. The securities reset interest rates in weekly or monthly auctions, but had long-dated maturities.
Confidence in the sector collapsed in February after the market lost faith in the triple A guarantees from bond insurers that backed many of the securities.
Bloomberg reported that Deutsche Bank declined to comment; Goldman said it was "co-operating fully" with regulators and Bank of America said it did not discuss talks with regulators.
Copyright The Financial Times Limited 2008
Source: http://www.ft.com/cms/s/0/b2ac89a2-6f17-11dd-a80a-0000779fd18c.html