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UBS joins Citi, Merrill in mass buyback of stressed securities PDF Print E-mail
Sunday, 10 August 2008

AFP, WASHINGTON  - Swiss banking giant UBS joined Citigroup, Merrill Lynch and other major banks Friday as US regulators announced it had agreed to buy back 18.6 billion dollars' worth of stressed securities.

Regulators had said earlier Friday that the UBS buy back amounted to 19.4 billion dollars, but the actual tally is 18.6 billion dollars, the bank said.

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

"The division's agreement in principle with UBS, if approved by the commission, will quickly restore liquidity to tens of thousands of UBS investors," said Linda Chatman Thomsen, the head of the Securities and Exchange Commission's enforcement division.

Massachusetts regulators said the Swiss bank had also agreed to pay civil fines totaling 150 million dollars as part of a pact with state authorities.

UBS said it would endure a pre-tax charge of around 900 million dollars related to its settlement. Analysts say other banks are also likely to undergo financial hits from the buy backs.

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

"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 Management Americas.

Hoekstra said UBS would be the first bank to make all its clients "whole." The bank has denied any wrongdoing.

At the heart of regulators' probes is the question of how the banks marketed the securities to investors.

Some investors have claimed that the banks misrepresented how quickly the securities could be redeemed if an investor decided to cash them in.

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.

They 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.

UBS's deal with regulators comes a day after US banking behemoth Citigroup agreed to buy back 7.5 billion dollars' worth of auction rate securities it marketed to 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.

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