Citigroup agreed to a $7.6 billion (£3.9 billion) landmark deal with regulators yesterday to settle charges that it mis-sold bonds to customers. Hours later, Merrill Lynch announced its own plans to buy back from clients up to $10 billion of the same asset class, known as auction-rate securities (ARS). Analysts described the moves as “another body blow” to the banking industry.

Citigroup agreed to buy back $7.5 billion in illiquid bonds that it was alleged to have mis-sold to investors and pay a $100 million civil fine to settle allegations that it had fraudulently marketed the securities. Merrill Lynch, which had been charged by state regulators for allegedly pushing ARS with misleading sales tactics, said that it would buy them back to help clients who had been “caught in an unprecedented liquidity crisis”.

Other significant ARS providers include Royal Bank of Scotland, HSBC and UBS. State regulators have also charged UBS, which. like Merrill Lynch, denies any wrongdoing. However, a spokesman said that UBS was nonetheless “working with regulators toward a comprehensive solution for all ARS investors”. A 12-state task force, led by Texas, is investigating 12 Wall Street firms over their involvement in the ARS market.

Denise Voigt Crawford, the Texas State Securities Commissioner, said she expected that “some will settle very soon, maybe perhaps in the next couple of weeks.”

RBS declined to comment. HSBC offered, at the end of June, to buy back loan-backed ARS that its clients had been unable to sell since the market froze in February. It has not disclosed how much these are worth or what the take-up has been.

Citigroup and some other market participants stood accused of telling customers that the assets were safe and almost as liquid as cash. However, trading in them has virtually evaporated in recent months.

Under the settlement, Citigroup agreed to help more than 2,600 clients to sell about $12 billion of ARS that they own.

Sean Egan, of Egan Jones Ratings, said: “This might not be the killer punch, but it is another body blow for the banking industry. It is going to significantly worsen the credit crunch and will be bad for the shares and balance sheets of leading players.”

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