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State cuts deals with Citigroup

The state has reached an agreement with the investment banking arm of Citigroup that assures the state will get back the nearly $869 million it invested in auction rate securities before the market for those securities tanked in 2008.

Citigroup has agreed to buy back at face value any of the now illiquid securities that the state is not able to sell by 2015.

The state purchased more than a billion dollars of the securities from Citigroup Global Markets over a 10-year period only to have the market for them collapse beginning in 2008. Hawaii was among dozens of states and municipalities that bought auction rate securities, which were marketed by brokers as liquid investments with higher rates of return than bank accounts or certificates of deposit.

Auction rate securities are long-term bonds or notes whose rates are reset every few weeks at auction. After the auctions began failing during the credit crunch, investors were unable to access their money when they wanted. In some cases the only way investors would be guaranteed of getting their principal back would be to hold the securities to maturity.

Hawaii has been able to sell about $200 million of the securities at face value since February 2008 and currently holds about $869 million of them in its investment portfolio. The state’s auction rate securities have maturities extending past 30 years in some cases.

"I believe this agreement is a good deal for the state," said Attorney General Mark Bennett. "We will continue to collect the interest on the securities, and will be able to sell them back to Citigroup at par in 2015 if we so choose," Bennett said.

"Bottom line, taxpayers will not lose out on the principal value of these securities, and that is a good result for Hawaii and its citizens."

Returns on Hawaii’s auction rate securities are averaging around 1.8 percent, better than the quarter- to half-percent yields currently offered by Treasury securities, Bennett said.

Under terms of the agreement, which state officials have been negotiating with Citigroup for several months, the state has several options to dispose of the securities in ways that protect the state from incurring any losses, Bennett said.

In June 2015 the state will have the option to require Citigroup to buy some or all of the remaining auction rate securities at their face value. If any of the securities are liquidated below face value as a result of forces outside the state’s control, Citigroup will pay the state the difference.

In addition, starting in July 2012 the state will have the ability to sell up to $150 million of the securities at market value and have Citigroup make up the difference of that price and face value in July 2015.

The state Department of Budget and Finance’s purchases of the auction-rate securities was criticized this spring by state Auditor Marion Higa, who questioned whether officials had adequate oversight of the purchases. Higa said the department may have failed to do risk assessments and may have broken its own guidelines limiting the amount of certain holdings.

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