Merrill Lynch, which sold $12 billion of auction-rate securities to retail investors, is to repurchase the securities on 1 October, when it estimates $10 billion of the securities will be outstanding. Merrill Lynch has agreed to pay a $125 million fine. Meanwhile, Goldman will pay fines of $22.5 million and Deutsche Bank will pay $15 million.

A number of other banks, including Morgan Stanley and UBS, have already agreed to make good the ARS losses.

The settlement yesterday was announced by Andrew Cuomo, New York attorney-general, who has led the US investigations into the sale of these securities, that had been likened to cash in terms of their liquidity and security but which fell sharply as the credit markets froze up earlier this year.

The collapse of the $330 billion market in February highlighted the liquidity risk in the long-term securities, whose interest rates are set weekly or monthly at auctions to appeal to investors seeking short-term investments. Banks withdrew support for the sector in February, and it has been largely illiquid since.

In a statement, Goldman Sachs said: “To the extent that a private client has incurred consequential damages beyond the loss of liquidity in the private client's holdings of ARS, Goldman Sachs will participate in a special arbitration process in which Goldman Sachs will be precluded from contesting liability from the sale of the ARS. Goldman Sachs will endeavor to continue to work with issuers and other interested parties, including regulatory and government entities, to expeditiously provide liquidity solutions for institutional investors.”

On 7 August, Merrill had announced it would repurchase ARS from retail clients.