In an announcement that shows how remarkable flawed the marketing and risk management at Citigroup (C) have been, the bank agreed to buy-back $7.5 billion in auction rate securities. It will also pay fines totaling $100 million for improperly selling the paper as "cash equivalents."
To make the matter worse, Citi will have to start “restoring liquidity” to more than 2,600 institutions holding about $12 billion of the instruments, the SEC said, according to Bloomberg. It is not clear what that will cost the bank, but it could be several billion more dollars.
The move puts a knife in the back of other banks negotiating with authorities and puts them into the position of having to give the government almost everything its wants, the near-equivalent of full restitution for all customers who bought auction-rate securities.
At least Citi could have put up more of a fight on behalf of its peers.
Douglas A. McIntyre
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