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has agreed to buy back $869 million worth of illiquid assets from Hawaii, according to the state's attorney general.

Hawaii AG Michael Bennett says Citi's investment banking arm will buy back at face value the remaining auction-rate securities (ARS) that it sold to Hawaii before the ARS market froze up. Hawaii has been able to sell another $200 million worth of the securities to other investors since purchasing them in February 2008.

"The state will essentially get back what it paid for these securities, plus interest collected on them," Bennett said in a statement. "The alternative - lengthy, expensive litigation - would have provided no certainty, and might, in the end, have been unsuccessful."

The notes are averaging about a 1.8% return, he added, far better than the rates offered by Treasury bonds. A Citi spokesman said the bank was "pleased" to have reached a solution.

The settlement is the latest in a long-running battle over ARS between investors and banks. The securities are long-term assets whose interest rates reset at periodic auctions. They were often marketed as "cash-like" securities with plenty of liquidity. But since the credit crisis erupted in mid-2008, the market has remained essentially at a standstill.

Since then, nearly all big banks with capital markets divisions - including Citi,

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- all reached major settlements with investors of tens or hundreds of millions of dollars apiece.

In repurchasing the securities, some have noted that, similar to "toxic" assets, ARS aren't worthless - there's just no market to sell them in. Still, Wells Fargo booked a $150 million charge a year ago related to a $1.9 billion ARS settlement. And though the notes may continue to receive interest payments, it's unclear how the assets are being valued on banks' books.

Plurius Valuation Advisers thinks the market for ARS, which once stood at $330 billion, is "unlikely to ever return." However, the secondary market for those securities has picked up slightly and is more reflective of the so-called "fair value" of ARS than in it has been over the past two years.

Read More:

>>>Merrill, Citi to Buy Back Auction-Rate Debt

>>>BofA Reaches Auction-Rate Settlement

>>> Wells Sees $150M ARS-Related Charge

>>>Today's Outrage: Schwab's ARS Victimhood

-- Written by Lauren Tara LaCapra in New York


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