Auction-rate buybacks add to bank writedown worries

NEW YORK (Reuters) - Global banks may have to write down up to $10 billion of auction-rate securities after buying them back from retail customers.

Eight banks have agreed to buy back more than $55 billion of auction-rate securities from investors at face value in recent weeks, after regulators accused them of failing to fully explain the securities' risks to clients.

But those securities are in some cases now worth 70 to 85 cents on the dollar, which means losses for banks that are not keen to record more.

"The timing is not ideal given the balance sheets of a lot of these companies," said Walter Todd, portfolio manager at Greenwood Capital in Greenwood, South Carolina.

The biggest settlements so far have been with Citigroup Inc (C.N), Merrill Lynch & Co Inc MER.N, UBS (UBSN.VX) and Wachovia Corp WB.N.

Financial institutions globally have recorded more than $400 billion of write-downs since their holdings of mortgages and repackaged debt first started to lose value about a year ago.

Most banks have only agreed to buy back retail investors' auction-rate securities, which are mainly issued by municipalities, closed-end funds and student loan agencies.

The muni securities are worth on average 90 to 98 cents on the dollar, while student loan auction rate notes are worth 70 to 85 cents on the dollar. Closed-end funds' auction-rate preferred securities are worth between 85 and 95 cents on the dollar, according to data from Restricted Stock Partners, which runs a secondary market for auction-rate securities.

Brian Weber, analyst at investment bank Houlihan Smith & Co, estimates total losses across all banks at around $5 billion to $10 billion for the retail investor buybacks.

Auction-rate securities were sold to investors as safe cash-equivalents. They were typically long-term notes or preferred shares whose yields reset periodically through auctions.

As those auctions started failing, the securities unexpectedly became long-term investments for their owners, which cut into their value.

The auction-rate securities market was estimated to be about $300 billion by the trade body Securities Industry and Financial Markets Association at the end of February, around the time the auctions failed.

Other banks that have agreed to buy back auction-rate securities include Citigroup, Deutsche Bank (DBKGn.DE), Goldman Sachs Group Inc (GS.N), JPMorgan Chase & Co (JPM.N) and Morgan Stanley (MS.N).

Citigroup, which agreed on August 7 to buy back $7.5 billion of auction-rate securities at face value, said in a statement it expects the difference between the purchase price and the market value to be about $500 million.

UBS said it expects the costs associated with its settlement to be about $900 million on a pre-tax basis.

Wachovia recorded a $500 million increase to its legal reserves for the second quarter as a result of the auction-rate securities investigation. In a statement this month after it settled with regulators, the bank said it expects to record a further $275 million increase in legal reserves for the third quarter.

Merrill Lynch said last week it does not expect buying back the securities to have a materially adverse impact on its capital ratios, liquidity or consolidated financial performance."

(Editing by Richard Chang)