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November 24, 2010

Citigroup, Hawaii End $1 Billion Auction-Rate Dispute

By Douglas Wong

Nov. 24 (Bloomberg) —  Citigroup Inc. agreed to buy back $869 million of auction-rate securities it had sold to Hawaii and repay the state for losses on securities it had previously liquidated, Hawaii’s Attorney General Mark Bennett said.

The settlement means Hawaiian taxpayers will lose no principal on their investments in the securities, Bennett said in a statement posted on his official website. Citigroup admits no wrongdoing and Hawaii won’t pursue claims against the bank, according to the statement.

Hawaii has liquidated $200 million of the securities, which are backed by pools of federally guaranteed student loans, since February 2008. Alexander Samuelson, a Citigroup spokesman, said in a statement that the bank was “pleased to provide this liquidity solution to the state.”

The securities get their name from the weekly, bank-run auctions where the interest rate they pay investors is determined. The market, which once stood at $330 billion, collapsed in 2008 as banks stopped using their own cash to prop up the auctions. That left investors with bonds they couldn’t sell and forced borrowers such as hospitals to pay a premium.

Bloomberg News reported in March that the securities were sold to Hawaii as low-risk substitutes for U.S. Treasury bills by Citigroup broker Pete Thompson in Honolulu.

Legislative Lobbying

The state’s auction-rate purchases began after the broker successfully lobbied legislators in 1997 for a change in state law to permit the transactions. Thompson didn’t know the market was failing when he sold the state the bonds, he said in a March 24 interview

Hawaii last year rejected as “sorely lacking” an offer by Citigroup to buy back at an unspecified discount the auction- rate securities sold by Thompson, Randall Nishiyama, a deputy attorney general, said in a telephone interview earlier this year. The Hawaiian Treasury bought the auction-rate bonds without making all of the required monthly disclosures to the state’s director of the Department of Budget and Finance, according to a March 18 report by Auditor Marion M. Higa.

In the agreement with New York-based Citigroup, the state can obtain “ interim liquidity” on as much as $150 million of the securities from July 2012 at market value, according to the attorney general’s Nov. 23 statement. The bank will pay the difference between that market value and par in July 2015.

Investing Since 1998

Hawaii’s Department of Budget and Finance, which manages the state treasury, made its first investments in student loan auction-rate securities in 1998, according to the report by Higa. The holdings climbed from $427 million in July of 2007 to almost $1.1 billion in February 2008, when the auctions that allowed investors to sell the bonds began failing.

The settlement won’t result in a charge for Citigroup because the expected costs are covered under previously accumulated legal reserves, said a person with knowledge of the matter who requested anonymity.

Saber Partners LLC, a New York-based financial adviser, assisted Hawaii in the negotiations with Citigroup, according to the firm’s chief executive officer, Joseph Fichera.

For Related News and Information:
Auction-Rate Stories: NI AUCRATES BN
Detailed overview of state finances: MIFA
Top municipal finance stories: MUNT
Municipal Issuer Information: SMUN
Top legal stories: TLAW
Bloomberg legal resources: BLAW

–With assistance from Christopher Palmeri in Los Angeles and Bradley Keoun in New York. Editors: Andreea Papuc, Linus Chua, Mark Schoifet.

To contact the editor responsible for this story: Douglas Wong in Hong Kong at +852-2977-6451 or dwong19@bloomberg.net

To contact the editor responsible for this story: Mark Tannenbaum at +1-212-617-1962 or mtannen@bloomberg.net.


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