Morgan Bows to Cuomo in Auction-Rate Fight

Morgan Stanley(MS Quote) on late Monday said it would buy back auction-rate securities from retail clients who purchased them prior to the market's seizure in February, as state and federal regulators clamp down on several rivals.

Beginning at the end of September, Morgan Stanley said it would begin to buy back some $4.5 billion in auction-rate securities held by all individuals, charities and small- to medium-sized businesses with accounts of $10 million or less that bought the securities prior to Feb. 13. The firm also pledged to make whole any clients who purchased the securities and sold them at a loss between Feb. 12 and Monday.

Morgan also will make no-cost loans available to retail clients until the securities are repurchased and pledged to "use its best efforts to provide liquidity solutions" to institutional investors "with the goal of resolving institutional investor clients' liquidity concerns no later than the end of 2009."

The firm's announcement came just hours after New York Attorney General Andrew Cuomo singled it out along with JPMorgan Chase(JPM Quote) and Wachovia(WB Quote) in the ever-widening probe into the stalled auction-rate securities market.

Regulators allege many Wall Street firms overstated the safety of the securities to investors, likening them to cash. Auction-rate securities are debt instruments whose interest rates reset at regular intervals through a bidding process. But amid the credit market disruption, the auctions failed in February, making the market illiquid.

Cuomo, other state legal and regulatory authorities and the Securities and Exchange Commission last week reached settlements with Citigroup(C Quote) and UBS(UBS Quote) in the probe.