Citigroup Ordered to Buy Back up to $20 Billion in Auction-Rate Securities

Citigroup could have to take as much as $20 billion in securities from failed auctions on to its balance sheet and will pay a variety of fines and reimbursements in a settlement with U.S. regulators.

In February, the market for auction-rate securities (ARS) fell victim to the credit crunch. Banks had marketed the products, which were largely municipal funding instruments, as extremely liquid. Instead, investors were locked into the securities when demand evaporated and the banks refused to backstop the market.

Citigroup has agreed to buy back all the securities it marketed to individuals and institutions without admitting any wrongdoing. Officials say they will also compensate clients for any losses resulting from forced sales into an illiquid market.

Citigroup officials said the action will have little effect on its balance sheet, saying the impact is "expected to be de minimus."

Citigroup will have three months to repurchase an estimated $7.3 billion from individual investors. The company said it has already completed half the buyback. Officials gave Citigroup until end of 2009 to repurchase $12 billion in the securities from institutions.

NY State Attorney General Andrew Cuomo said reimbursement is to go to more than 40,000 customers and Citigroup has agreed to a public arbitration process to resolve outstanding claims.

Because of the failure of the ARS, market municipalities were often forced to pay investors high interest rates. Instead, they bought back the securities and were forced to refinance with other instruments. Citigroup agreed to pay back refinancing fees.

Lawmakers also levied a $100 million fine.

By Adam Button and edited by Sarah Sussman