UBS forced to buy back “mis-sold” investments

UBS is under pressure in the US Keystone

Swiss banking giant UBS is facing further pressure after being forced to buy back $19.4 billion (SFr21 billion) of allegedly mis-sold bonds in the United States.

UBS confirmed the settlement on Friday just a week after paying out SFr4.6 million to investors in Massachusetts. A top lawyer recently stepped down at the bank in connection with the auction rate securities (ARS) probe.

UBS said in a statement issued on Friday evening that it had made the agreement in principle with the state of Massachusetts and a group of state regulators including New York, as well as the Securities and Exchange Commission.

Under its terms, UBS has committed to purchase $8.3 billion ARS from most private clients in a two-year period.

It added that it would buy back $10.3 billion ARS from institutional clients from June 2010.

The full cost of the proposed ARS settlement is in the range of $900 million.

“[The] 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 Management Americas, in the statement.

“Our leading position in supporting the market and providing liquidity is clear, and now, we are the first firm to give all clients – private, corporate and institutional – the opportunity to be made whole,” he added.

$150 million fine

UBS was also fined $150 million, split between Massachusetts and New York, but the bank has denied any wrongdoing.

Provision for settlement costs are to be included in Q2 results.

The repayments were sparked by allegations that the bank misled investors into believing the bonds were as safe as cash, only to see them dip in value months later. It faced fraud charges in New York, Massachusetts and Texas and from the US federal authorities.

About 50,000 customers have been stuck holding $37 billion worth of the securities, unable to sell them since the market collapsed in February.

Investigators found that UBS executives had sold their own personal stakes in the market, including lawyer David Aufhauser who will leave the bank in September.

The news comes as another blow to UBS after it was probed for allegedly helping clients evade taxes in the US. This investigation led to the bank announcing it would end its offshore banking activities in the country.

Last year UBS had to make huge writedowns after the US subprime mortgage sector collapsed.

Damage limitation

Zurich Cantonal Bank analyst Andreas Venditti told swissinfo that buying back the devalued securities at the same price that they were sold may cost the bank further writedowns in future.

“The big question is how much they will have to write down if they buy them back at par value and what is underlying these securities,” he said.

Auction rate securities are bonds sold by non-profit organisations and local governments to raise money for projects. UBS has previously stated that many of the securities it sold were backed by student loans.

UBS is not the only bank to be caught up in investigations surrounding the sale of such securities. US banks Citigroup and Merrill Lynch are also thrashing out similar deals with US regulators while Switzerland’s second largest bank, Credit Suisse, is also being sued by a computer chip maker.

Venditti believes the UBS deal was probably an exercise in damage limitation as it seeks to defend its dented reputation. He added that UBS could face an exodus of wealthy clients investing their assets at the bank if its image is shaken further by the latest events.

“A number of major players in the US have been involved in this market, but Europe does not really have these problems,” he told swissinfo. “UBS could potentially lose some clients as a result of this and smaller private banks might be set to profit.”

swissinfo, Matthew Allen

UBS woes

UBS endured a tough 2007 and has spent the first half of 2008 in no better shape as a result of the US subprime mortgage crisis.

In July 2007, chief executive Peter Wuffli stepped down following the collapse of the bank’s hedge fund Dillon Read Capital Management.

In October 2007, UBS said it would cut 1,500 jobs in its investment banking arm, including that of its head Huw Jenkins. Chief financial officer, Clive Standish, left at the same time.

UBS has written down some $37 billion as a result of the subprime mortgage market collapse. Chairman Marcel Ospel stepped down in April.

The bank was then investigated for allegedly helping US citizens evade taxes, following a confession from a former employee. The case led to UBS stating it would stop offshore banking activities in the US.