Aug. 7 (Bloomberg) -- Merrill Lynch & Co. said it will offer to buy back about $10 billion in auction-rate securities from retail clients after Citigroup Inc. agreed to take similar steps under a settlement with U.S. and state regulators.

Merrill will pay face value for the securities, according to a statement today from the New York-based firm. The buybacks will begin in January and continue for a year. The investments have been frozen in customer accounts since Wall Street firms backed away from the market in February, leading to claims by customers and investigations by the U.S. Securities and Exchange Commission and regulators in New York and Massachusetts.

``Our clients have been caught in an unprecedented liquidity crisis,'' Chief Executive Officer John Thain said in the statement. ``We are solving it by giving them the option of selling their positions to us.''

Regulators have been probing how banks and Wall Street firms sold auction-rate securities before the $330 billion market collapsed in February. Citigroup, the biggest U.S. bank by assets, earlier today reached an agreement with state and federal regulators to buy back about $7.5 billion in securities from its brokerage clients.

Regulators in Massachusetts filed a civil complaint against Merrill last week, claiming the firm and its analysts pitched the securities to investors as the market was collapsing.

``When one major firm settles a material piece of litigation, others follow suit pretty quickly,'' said Anthony Carfang, a partner at Treasury Strategies, a Chicago-based financial consultant. ``It puts pressure on other institutions to make their customers whole.''

Pending Complaints

Merrill extended its offer to individual investors, charities and small businesses. The firm said it doesn't expect purchases during the buyback period to have ``a materially adverse impact on its capital ratios, liquidity or consolidated financial performance.''

The firm must still resolve pending regulatory complaints. Massachusetts Secretary of the Commonwealth William Galvin said in a telephone interview that Merrill's redemption timeline is ``not satisfactory.''

``It's a start I suppose,'' Galvin said. ``I'm glad they did it, but I think for most investors it's not the solution they need.''

New York Attorney General Andrew Cuomo, who announced the Citigroup agreement at a press conference today in New York, said in a statement his office was evaluating Merrill's offer.

`Huge Sums'

``We've had an ongoing investigation into Merrill Lynch,'' Cuomo said. ``We are reviewing their plan to begin returning money to investors, which is obviously one of the goals we've established.''

Thomas Ajamie, a Houston-based securities lawyer who won a $429 million arbitration award against Paine Webber Group in 2001, said Merrill may be hoping its announcement will pressure regulators to accept the offer.

``There is probably a balance here between recognizing that people are entitled to it, and recognizing the realities of the size of this crisis,'' Ajamie said. ``They are trying to find a timetable to give people their money, yet recognize that they need to keep banks stable. These are huge sums of money.''

Merrill says clients currently hold about $12 billion of auction-rate securities, and that number will be reduced to $10 billion by January through ``announced and anticipated issue redemptions.'' On a conference call with investors last month, Merrill Chief Executive John Thain said the firm had reduced the frozen auction-rate securities from $22 billion by getting issuers to refinance them.

Precedent for UBS

In those deals, ``everyone got their money back,'' Thain said. Merrill has more than 16,000 financial advisers and oversees about $1.4 trillion of assets.

Citigroup agreed to pay a $100 million fine and make offers by November to buy back clients' auction-rate securities. The accord may set a precedent for negotiations with firms including UBS AG, the Swiss bank named in civil complaints by Cuomo and authorities in Massachusetts.

``Firms that don't settle are going to be frowned upon by investors,'' Texas State Securities Commissioner Denise Voigt Crawford said.

Auction-rate securities are bonds or preferred shares whose interest rates are reset by periodic bidding run by dealers. Firms including Citigroup abandoned their routine role as buyers of last resort for the debt in mid-February as demand dried up, allowing the market to collapse and leaving investors stuck in what had been pitched to them as money-market-like instruments.

``Lots of investors are still stuck,'' said Joseph Fichera, chief executive of Saber Partners, a New York-based financial advisory firm. There's a ``light at the end of tunnel, but not a full resolution.''

To contact the reporter on this story: David Scheer in New York at dscheer@bloomberg.net; Bradley Keoun in New York at bkeoun@bloomberg.net.

Last Updated: August 7, 2008 19:47 EDT