Auction-rate buybacks add to worries

By Elinor Comlay

NEW YORK (Reuters) - Global banks may have to write down up to $10 billion (5.4 billion pounds) of auction-rate securities after buying them back from retail customers.

Eight banks have agreed to buy back more than $55 billion of auction-rate securities from investors at face value in recent weeks, after regulators accused them of failing to fully explain the securities' risks to clients.

But those securities are in some cases now worth 70 to 85 cents on the dollar, which means losses for banks that are not keen to record more.

"The timing is not ideal given the balance sheets of a lot of these companies," said Walter Todd, portfolio manager at Greenwood Capital in Greenwood, South Carolina.

The biggest settlements so far have been with Citigroup (C.N), Merrill Lynch MER.N, UBS (UBSN.VX) and Wachovia WB.N.

Financial institutions globally have recorded more than $400 billion of write-downs since their holdings of mortgages and repackaged debt first started to lose value about a year ago.

Most banks have only agreed to buy back retail investors' auction-rate securities, which are mainly issued by municipalities, closed-end funds and student loan agencies.

The muni securities are worth on average 90 to 98 cents on the dollar, while student loan auction rate notes are worth 70 to 85 cents on the dollar. Closed-end funds' auction-rate preferred securities are worth between 85 and 95 cents on the dollar, according to data from Restricted Stock Partners, which runs a secondary market for auction-rate securities.