SunTrust may buy back $500M in auction-rate securities

Atlanta-based SunTrust Banks said Monday it is in talks with regulators that could result in the bank’s buying back about $500 million in auction-rate securities from investors.

Over the past 20 years, the market for these securities exploded into a $330 billion business. But in February, the market for them effectively collapsed amid the global credit crunch.

Regulators have been investigating who was to blame and whether banks misled any investors about the level of risk.

SunTrust said any potential losses would be offset by two recent moves: earnings from the sale of a commercial vehicle fleet management company and an expected $69 million tax benefit from the charitable contribution of 3.6 million shares of Coca-Cola stock.

The announcement was made in a filing with the Securities and Exchange Commission in advance of an investor conference Wednesday.

SunTrust’s stock price soared Monday along with other financial services companies in response to the government bailout of Fannie Mae and Freddie Mac. It finished at $50.93, a 12 percent jump.

But the company still faces challenges from the troubled real estate market that has some analysts concerned.

In the filing, SunTrust reiterated that third quarter loan charge-offs are expected to increase 15 percent to 20 percent over the second quarter.

Moody’s Investors Service last week downgraded its rating of SunTrust’s debt, citing the company’s “sizable” residential and commercial mortgage holdings that are at risk from the real estate downturn.

For the fourth quarter, SunTrust said charge-offs would be in line with the third quarter and forecast a “modest” increase in loan loss reserves.

Many of the nation’s biggest investment banks, including Citigroup, Morgan Stanley and JPMorgan Chase and Co., have already reached settlements with federal and state agencies looking into the auction-rate mess.

In all, eight banks have agreed to buy back a total of $50 billion in securities, according to the Associated Press.

SunTrust was a much smaller player in the auction-rate securities game than the other banks, which are now facing huge financial blows.

Wachovia, for example, has agreed to buy back $8.5 billion in securities and pay $50 million in fines, and UBS has agreed to buy back up to $18.6 billion and pay $150 million in fines.

The potential impact for SunTrust is fairly minimal, said Chris Marinac of Atlanta-based FIG Partners.

The possible $500 million figure, if true, would be little more than a “nuisance,” amounting to about $1 per share, he said.

“It’s not that big of a deal,” Marinac said. “We think SunTrust has the ability to stay profitable in this environment and still have higher than average charge-offs and still build reserves.”