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US: Wachovia to bail out clients holding auction rate securities

August 15th, 2008

WASHINGTON (AFP) - Wachovia has become the latest US bank to agree to buy back billions of dollars of tainted auction rate securities that it sold before a market collapse in February, US officials announced Friday.

The Securities and Exchange Commission said Wachovia had agreed in a preliminary deal to buy back up to nine billion dollars in auction rate securities that it marketed to investors.

Other banks, including JPMorgan Chase, Morgan Stanley, Citigroup and Swiss banking giant UBS have already agreed to repurchase billions of dollars' worth of the stressed securities amid an ongoing government probe.

"This agreement in principle with Wachovia, if approved by the commission, will permit tens of thousands of Wachovia investors to get their money back," said Linda Chatman Thomsen, the head of the SEC's enforcement division.

Federal and state regulators claim Wachovia and other banks marketed the securities as being highly liquid and as accessible as cash, but they in fact were difficult to redeem.

US banks marketed billions of dollars' worth of the securities to investors in recent years, but the market for auction rate securities imploded in February as a continuing credit crunch worsened.

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 change at auctions run by the banks.

Many investors sustained hefty losses after the market for the securities collapsed in February.

The SEC, which has yet to formally approve the deal with Wachovia, said that Wachovia could still face a civil fine which will be determined in part on how well the bank fulfils its obligations under the pact announced Friday.

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