Morgan Stanley and JPMorgan Chase agreed to buy back billions of dollars of illiquid auction-rate securities and pay fines to settle charges that they misled investors about the debt's risk.
The banks are the third and fourth to reach auction-rate settlements with New York Attorney General Andrew Cuomo, joining Citigroup and UBS, which settled last week.
Morgan Stanley agreed to buy back $4.5 billion of debt and pay a $35 million fine, while JPMorgan agreed to buy back $3 billion of debt and pay a $25 million fine.
Regulators say brokerages misled investors into believing that auction-rate debt, which has rates that reset in periodic auctions, was safe and the equivalent of cash. Much of the $330 billion market has been frozen since February, when brokerages abandoned their traditional role as buyers of last resort.
"You have hundreds of thousands of people being caught in a financial nightmare," Cuomo said at a news conference announcing the settlements. "I believe we have crossed the Rubicon and established the premise that the investors will be helped. The nightmare will end."
Citigroup and UBS agreed to buy back a combined $26 billion of the debt and pay $250 million in fines. Other banks are also being examined in what Cuomo called an "industrywide" probe.
Separately, UBS was the target Thursday of a lawsuit by New Hampshire securities regulators, who said the Swiss bank misled the state's student loan agency about auction-rate debt, resulting in less money available to help college students.
Morgan Stanley will buy back its auction-rate debt from retail customers, charities and small to mid-sized businesses by December 11, while JPMorgan will do so by November 12. Both will reimburse customers who sold debt at a loss.
JPMorgan said its buyback may result in a $400 million pretax charge. Its settlement also covers debt sold by the former Bear Stearns Cos, which JPMorgan acquired in May.
Thursday's settlements may add to pressure on Merrill Lynch, Wachovia Corp, and other companies that sold auction-rate securities, to settle with regulators.
"The publicity is already bad enough for these banks," said Joseph Gordon, president of Gordon Asset Management LLC in Durham, North Carolina. "There is no incentive to drag it out and run up legal bills."
The U.S. Securities and Exchange Commission was not part of the Morgan Stanley and JPMorgan settlements, unlike the Citigroup and UBS settlements, but said its investigation into the auction-rate debt market was continuing.
"Under the SEC's longstanding policy, it's better for everyone when harmed investors get their money back before investigations are completed," SEC spokesman John Nester said.
It was not immediately clear how investors who bought now-illiquid auction-rate debt from discount brokerages or mutual fund companies would be treated.
Wachovia may be close to an accord with regulators relating to $9.5 billion of auction-rate debt, according to Ryan Hobart, a spokesman for Missouri Secretary of State Robin Carnahan.
On Monday, Wachovia set aside $500 million of reserves for a possible auction-rate settlement.
Merrill, meanwhile, has offered to buy back as much as $12 billion of the debt but has not settled with regulators. Cuomo called the offer "a good thing" but said it wasn't enough. He said he has had talks with Merrill.
Wachovia spokeswoman Christy Phillips-Brown and Merrill spokesman Mark Herr declined to comment.
Goldman Sachs Group Inc declined to address a report in the Wall Street Journal that it is refusing to buy back auction-rate debt from its wealthy clients.
Spokeswoman Andrea Raphael said Goldman "has been working with clients to address their liquidity needs" and is cooperating with regulators.