Merrill, Citi to Buy Back Auction-Rate Debt

Updated from 5:09 p.m. EDT

Merrill Lynch(MER Quote) on late Thursday said it would buy back some $12 billion in auction-rate securities it sold to retail investors, just hours after Citigroup(C Quote) agreed to a more than $7 billion settlement with state and federal authorities related to the faltering market.

Merrill, in a press release issued after the closing bell, said it would between Jan. 15, 2009 and Jan. 15, 2010, buy at par auction rate securities sold to more than 30,000 clients who hold municipal, closed-end funds and student loan auction rate securities. Regulators have been scrutinizing firms' role in marketing the securities as safe investments, since the market froze up in February.

"Our clients have been caught in an unprecedented liquidity crisis," Merrill Chairman and CEO John Thain said in the company statement. "We are solving it by giving them the option of selling their positions to us."

The firm, however, acknowledged "the important role being played" by the Securities and Exchange Commission, New York state Attorney General Andrew M. Cuomo, the Massachusetts Securities Division and the North American Securities Administrators Association, all of which were involved in the hefty settlement Citi agreed to earlier in the day. It entered a settlement with the Commonwealth of Massachusetts related to the auction-rate probe earlier this year.

Under the terms of its agreement announced Thursday with the New York State Attorney General and the SEC, Citi has agreed over the next three months to buy back $7.3 billion of illiquid auction-rate securities from approximately 40,000 retail customers, which includes individuals, not-for-profit entities and small businesses, the New York-based bank and regulators say. Customers bought the investments prior to Feb. 11.