Two of the country’s biggest financial firms agreed Thursday to buy back $17 billion in troubled fixed-income securities, ratcheting up pressure on the rest of the industry to bail out clients stuck with the investments.

Citigroup Inc. and Merrill Lynch & Co. promised to repurchase so-called auction-rate securities at face value from individual investors -- as well as charities and small businesses -- who have been unable to sell them at full price since the market for them seized up in February.

The repurchases will help 70,000 customers -- 40,000 at Citigroup holding $7 billion in securities and 30,000 at Merrill with $10 billion.

Citigroup estimates that the securities it is repurchasing have a current market value of $6.5 billion. Merrill did not provide an estimate.


The deals intensify the legal and public relations pressure on dozens of other banks to cut deals with their clients, experts said.

“This was the necessary domino falling for all the other dominoes to fall,” Andrew Stoltmann, an investors’ attorney in Chicago, said of Citigroup’s action. “It provides cover to the other firms to be able to say to their boards of directors, ‘Gee, look what Citigroup did. Let’s follow that.’ ”

Citigroup agreed to its buy-back as part of a settlement with New York Atty. Gen. Andrew Cuomo and the Securities and Exchange Commission. The company also will pay a $100-million fine.

Merrill announced its buy-back plan several hours after the Citigroup settlement was unveiled.


Neither company is buying auction-rate securities held by institutional investors, but Citigroup pledged to help 2,600 institutional clients unload $12 billion of the investments.

The Citigroup deal ended a probe by regulators into whether the company downplayed the riskiness of the securities to customers. Merrill also has been under investigation by Cuomo.

The two firms’ buyback plans differ in their timing.

Citigroup said it would finish its repurchases by Nov. 5. Merrill said it would conduct its program over the course of a year starting Jan. 15.


Investors such as Melinda Bittan can only hope that other banks follow suit. The freelance public relations specialist in Los Angeles had half her life savings invested in auction-rate securities at Wells Fargo & Co. when the market capsized in mid-February.

“I was thrilled when I heard about” the buyback, Bittan said. “It gives you hope that it sends a message to other firms that they [should] do something before an attorney general comes after them.”

Banks attracted thousands of individual investors to auction-rate securities in recent years by pitching them as safe and easily redeemable but higher-yielding than money market funds.

More than $300 billion of auction-rate securities -- long-term debt instruments that, in effect, were marketed as short-term debt -- were issued in recent years.


Investors were told they could unload the securities at face value at regular auctions held as frequently as once a week. The interest rates would be reset at each auction based on how much buyers were willing to pay.

But the reset auctions ground to a halt in February as the credit crunch worsened and demand dried up for complex securities of any sort.

Although issuers have redeemed some auction-rate securities, investors still hold more than $200 billion of them, said Barry Silbert, chief executive of Restricted Stock Partners in New York.

Citigroup and Merrill said they had been trying to help customers unload their auction-rate securities. “Our most important focus continues to be on helping our clients,” Citigroup said in a statement.


“Our clients have been caught in an unprecedented liquidity crisis,” Merrill Chief Executive John Thain said in a statement. “We are solving it by giving them the option of selling their positions to us.”

Also Thursday, Morgan Stanley agreed to repurchase $1.5 million in auction-rate securities from two municipalities in Massachusetts, and Bank of America Corp. disclosed that it had received subpoenas and requests for information from state and federal regulators regarding its sale of auction-rate securities.

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walter.hamilton@latimes.com