NEW YORK—Big banks just cannot seem to catch a break these days. On Friday, the Massachusetts Secretary of State said that Swiss banking giant UBS AG became the latest bank to reach a settlement to buy back illiquid auction rate securities from investors for $19.4 billion.
UBS is the fourth major bank to settle on charges of ARS misconducts. Early last week, Citigroup Inc. agreed to pay fines of more than $100 million and buy back $7 billion in securities from investors. Last Thursday, Merrill Lynch reached a similar settlement with authorities, agreed to pay around $12 billion. Morgan Stanley also promised to buy back billions of dollars in ARS from its clients.
Auction rate securities were billed as highly liquid, short-term investments that corporations, funds, and high-net-worth individuals purchase with their excess cash. ARS can be backed by corporate debt, student loans, credit derivatives, and municipalities. ARS are bought and sold at periodic auctions held by broker-dealers such as UBS, Citi, and Merrill.
Due to the credit crunch, many ARS auctions failed during the first quarter of 2008, when current ARS holders were unable to sell their positions.
The UBS agreement was reached with the U.S. Securities and Exchange Commission and several states, including Massachusetts and New York.
Regulators accused Wall Street banks of pushing the illiquid auction rate securities onto the hands of unsuspecting clients, upon finding out about the state of the market earlier in 2008. Many investors subsequently were stuck with such assets that they believed to be liquid, but in fact were not.
The investigations, however, are far from over. According to a filing with the SEC, Bank of America Corp. stated on Friday that it received a subpoena "requesting documents and information regarding municipal derivatives transactions,” which include auction rate securities.
On the same day, Swiss semiconductor company STMicroelectronics NV sued investment bank Credit Suisse Group for allegedly putting $450 million of the company’s cash reserves into risky auction rate security investments. The company accused Credit Suisse of illegal acts by “dumping into accounts of unsuspecting clients some of the worst ARS on the market,” according to a Bloomberg News report.
BNY Mellon is also reportedly under investigating by regulators regarding similar securities.
The auction rate securities investigation could not have come at a worse time for many global banks, most of which are posting losses in the billions as fallout from the U.S. subprime mortgage crisis and the subsequent credit liquidity crunch continue to settle.
The Financial Times reported that UBS would likely lose around $900 million in its settlement to buy back the securities at face value.