UBS joins Citi, Merrill in mass buyback

August 09, 2008 10:40:59 AM

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Swiss banking giant UBS joined Citigroup, Merrill Lynch and other major banks Friday as regulators announced it had agreed to buy back 19.4 billion dollars' worth of stressed securities.

Citigroup and Morgan Stanley signed up to similar deals with federal and state regulators a day earlier under which they have also agreed to buy back tainted securities which were marketed to tens of thousands of investors and thousands of institutional clients.

Merrill Lynch meanwhile announced Thursday that it would also be buying back a large tranche of auctioned securities as regulators continue to probe the bank's operations.

"There has been an agreement. UBS will pay 19.4 billion dollars to buy back these securities," said a spokesperson for William Galvin, the Massachusetts secretary of the commonwealth.

The official said the Swiss bank had also agreed to pay civil fines totaling 150 million dollars as part of the pact.

UBS's accord to buy back the auction rate securities (ARS) it was involved in marketing marks the largest such repurchase so far secured by the US authorities.

The Swiss bank said it would endure a pre-tax charge of around 900 million dollars related to its settlement.

"Today’s solution provides further relief, beginning in September, to investors who have been understandably frustrated by the industry-wide failure of the ARS market," said Marten Hoekstra, head of UBS Wealth Managment Americas.

Hoekstra said UBS would be the first bank to make all its clients "whole."

At the heart of regulators' probes were how the banks marketed auction rate securities to investors.

US banks and UBS marketed billions of dollars' worth of the complex securities in recent years, but the market for ARS imploded in February amid a broadening credit crunch that contributed to the collapse of the US bank Bear Stearns in March.

Auction rate securities, essentially debt instruments issued by financial firms, municipalities and student loan companies, typically have a fairly lengthy maturity. But the interest rates on such securities can be volatile and change at auctions run by the banks.

The instruments provided a rich business for many banks prior to the market's collapse in February which left panicked investors scrambling to redeem their holdings and nursing paper losses.

Law firms are encouraging disgruntled investors to sign up to class action lawsuits, suggesting that the banks could face legal costs in addition to fines paid to regulators.

Massachusetts's deal with UBS comes a day after US banking behemoth Citigroup agreed to buy back 7.5 billion dollars' worth of auction rate securities it marketed to tens of thousands of investors in a settlement with federal and state regulators.

And the investment bank Merrill Lynch said Thursday that it would buy back 12 billion dollars' worth of securities it had marketed.

"Our clients have been caught in an unprecedented liquidity crisis," Merrill chief executive John Thain said.

In a smaller accord, Morgan Stanley agreed Thursday to reimburse the Massachusetts city of New Bedford and the town authorities of Hopkinton 1.5 million dollars related to its marketing of auction rate securities.

Regulators have been probing how banks marketed the securities to investors. New York state attorney general Andrew Cuomo said Thursday that the banks marketed them by suggesting they were similar to cash investments and readily accessible.

But he said the securities were illiquid and could not be quickly redeemed.

The settlements have been reached as UBS, Citigroup and Merrill vie to shake off billions of dollars in losses tied to ailing mortgage investments and the sweeping credit squeeze that has gripped Wall Street in the past year.