Merrill Lynch Still Pricing Most Auction-Rates At Par

NEW YORK -(Dow Jones)- Merrill Lynch & Co. (MER), taking a different tack from UBS AG (UBS), told its brokers Monday afternoon that most clients' holdings of auction-rate securities will not be priced at a discount in their March statements.

Merrill Lynch said statements with prices for the securities would be posted Monday night, and could be viewed by clients with online access to statements.

UBS decided last week to price clients' holdings of the securities at a discount to reflect clients' inability to sell the securities due to failures in regularly scheduled auctions. Previously, clients, though unable to sell the securities, were told they were valued at par.

Merrill's decision to continue pricing most of the securities at par could hold off an eruption of anger from clients who are already frustrated at being unable to sell their securities. But it carries the risk of being criticized for ignoring a common practice of discounting illiquid securities.

In a conference call with Merrill brokers, a Merrill official said the firm would continue to use third-party pricing services to value auction-rate securities and that most of the securities will be priced at par. The firm didn't tell brokers what percentage of the securities might be priced at a discount, but it said any discounts wouldn't be large.

UBS officials said Friday they used an internal model in deciding to price them at a discount. The markdowns will range from a few percentage points to more than 20. Marten Hoekstra , head of UBS Wealth Management Americas, earlier said more than 90% of the securities are below 100%, but more than two-thirds of these securities valued subpar are valued at 97% or better.

Brokerages have long marketed auction-rate securities, commonly issued by municipalities, universities and closed-end funds, as liquid, super-safe investments with interest rates slightly superior to conventional money-market funds.

Investors, who range from big institutions to wealthy individuals, hold more than $300 billion in the long-term securities that carry short-term interest rates because the rates reset every seven to 35 days.

Until recently, the securities could be bought at regular auctions supervised by large Wall Street firms including UBS, Citigroup Inc. (C), Merrill Lynch and others. The system, which had worked well for years, suddenly seized up in February when the big banks, concerned about their balance sheets, stopped committing their own money to make sure auctions ran smoothly.

The inability to sell the securities has led to consternation and anger among investors. Although the frozen auctions mean these investors receive more attractive interest rates, many feel frustrated they have been unable to sell investments that they say were explained to them as safe and liquid. Some of the securities, moreover, have strict limits on how much the interest payments can increase.

Resolving the situation could take months, Sallie Krawcheck, head of Citigroup's Wealth Management Business, told investors on a conference call Monday afternoon. The conference call didn't address pricing, an investor on the call said.

During the call, Citigroup executives told investors that about 40% of auctions were succeeding, allowing some auction-rate investors to exit their holdings.

The easiest securities to sell are typically those issued by municipalities with the highest penalty rates, according to Citigroup . Securities issued by closed-end funds and student-loan authorities have been much trickier to unload.

Issuers that pay substantial penalties also have the strongest incentive to refinance their securities, essentially buying them back from investors. Citigroup estimated that up to $2 billion in auction-rate securities were being restructured each week, and that up to $100 billion could be restructured over the next nine to 12 months.

Merrill Lynch officials said on the call to brokers that the firm is working to find ways customers can eventually sell their holdings at par.

-By Evelyn Juan , Dow Jones Newswires; 416-306-2025; evelyn.juan@dowjones.com

-By Ian Salisbury , Dow Jones Newswires; 201-938-5219; ian.salisbury@ dowjones.com