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KAI RYSSDAL: There's nothing like the threat of a potentially embarrassing, dragged-out legal battle to focus the mind. The minds in question today are those of the people running Wall Street's big banks and brokerages. More than a dozen of them are in the crosshairs of federal and state authorities over their sales of something called auction-rate securities. Those bonds have become virtually impossible to sell on the open market.
Yesterday we told you Citigroup is going to buy back more than $7 billion-worth of them from its customers. Merrill Lynch followed with a promise to buy back $10 billion. Today there's word UBS will buy back $19 billion worth. With billions of losses already on the books, it's a fair question to ask whether they can really afford to do that. Marketplace's Bob Moon reports maybe they can't afford not to.
BOB MOON: It's not like they're throwing tens of billions of dollars down a rat hole. Duke University securities law professor James Cox says these banks are essentially offering to buy the frozen bonds back until they thaw out.
JAMES COX: They do have value, they just are not as liquid as everybody thought they were going to be. And if you hold them to maturity, you'll reap most of that value.
Cox says the massive buyback will be painful in the short term, but these struggling banks wouldn't be so eager to do it if it wasn't in their own best interests:
COX: There may be a silver lining here, that the banks' willingness to put this dimension of their problem behind them may indicate some optimism on their part that they're starting to see bottom.
But the banks may still need time to come up with the money. Tom Ajamie is a securities lawyer in Houston. He says even though these bonds were sold as being "as good as cash," the banks won't cash them in right away:
Tom Ajamie: What's really sad is that they can't even redeem the money, or refund the money right now. They're on schedules of trying to do it by the end of 2009, and in one case they're trying to do it by the end of 2010. Which in some ways is just very unacceptable. If you go deposit your money some place, you ought to be able to get it back when you want it back, not when the bank tells you they think they can give it back to you.
In the end, Boston University Professor Tamar Frankel says these settlements may be a bargain for the banks to save their reputations with customers:
TAMAR FRANKEL: Their life depends upon it. The most expensive way is to lose the trust, because then they won't exist anymore.
She says what Wall Street desperately needs to buy back is the confidence of its investors.
I'm Bob Moon for Marketplace.
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