Citigroup and Merrill to buy back auction-rate debt

By Grant McCool and Jonathan Stempel

NEW YORK (Reuters) - Citigroup (C.N) and Merrill Lynch MER.N said they would buy back billions of dollars of illiquid auction-rate securities from retail clients, and Citigroup agreed to pay a $100 million fine to settle charges it fraudulently misled investors about the debt's risk.

The announcements could pave the way for settlements or buybacks by UBS (UBSN.VX) and other financial companies whose clients own such debt, following the February meltdown of the $330 billion (170 billion pounds) auction-rate market.

Citigroup agreed to buy back about $7.5 billion of the debt, as part of settlements with New York Attorney General Andrew Cuomo and the U.S. Securities and Exchange Commission.

Meanwhile, after U.S. markets closed, Merrill offered for a one-year period beginning January 15, 2009 to buy back auction-rate debt it sold to retail clients. It estimated that its clients hold $12 billion of the debt.

Both companies offered to buy back the debt at face value.

For Citigroup, which said it may face a $500 million pre-tax loss, Thursday's settlement will hinder efforts by Chief Executive Vikram Pandit to cut costs and restore profitability following $17.4 billion of losses in the last three quarters.

"It's really a face-saving attempt," said Brian Yelvington, an analyst at CreditSights Inc in New York, referring to Citigroup. "Other banks that have sponsored these programs could be under pressure to do something similar."

Merrill's buyback offer, meanwhile, comes after a year when the bank and brokerage suffered $19.2 billion of losses.