Swiss bank UBS has agreed to buy back $19.4 billion of debt securities whose value collapsed during the global financial crisis and to pay $150 million in fines to settle charges it misled investors, Massachusetts' top securities regulator said.
Adding to concern over the deepening legal fallout of auction-rate securities that UBS and other banks marketed as being as safe and liquid as cash, the Bank of New York Mellon said one of its units was under investigation by U.S. regulators over auction-rate transactions.
This comes a day after Citigroupand Merrill Lynch said they would buy back almost $20 billion of such securities between them.
The UBS agreement, confirmed by Massachusetts Secretary of State William Galvin, could force Europe's biggest casualty of the markets turmoil to make further write-downs on the value of its assets beyond the $37 billion it has already taken.
JP Morgan reckons UBS could face $1 billion in write-downs. Others estimated that such a move could cost UBS $1.8 billion.
UBS now has a bill for the securities at face value even though they are worth less.
The $150 million in fines would be split between Massachusetts and New York, which accused UBS of steering broker clients into auction-rate securities that became impossible to sell when the credit market froze. (See the accompanying video for an exclusive interview with New York Attorney General Andrew Cuomo for more on the state's accusations.)
"It's obvious in the case of UBS, and we have internal documents that prove this, that they were well aware of the problems in the marketplace, that they manipulated them,'' Galvin told Reuters in an interview.
"Individuals who were orchestrated a campaign to sell these instruments to unsuspecting investors were in fact unloading their own personal inventory because they didn't want to suffer losses,'' Galvin added, describing the fallout over auction-rate securities as a national problem that festered for months.
"We're talking about $19.4 billion that we're seeking to get returned. That money has effectively been out of the American economy for several months. That has caused significant economic damage in this country.''
Accusations Against Merrill Lynch
Auction-rate securities are like regular bonds only the interest rate is set periodically at an auction. If no bidders turn up for the auctions — typically held every seven, 28 or 35 days — the market freezes.
Many big banks that sold the securities to investors had played down the risk of such a freeze.
The Bank of New York Mellon said in its quarterly report filed with the U.S. Securities and Exchange Commission that the SEC was investigating auction-rate transactions involving its Mellon Financial Markets unit. It said the unit was cooperating.
Galvin plans to proceed with a similar complaint against Merrill Lynch, accusing the bank of a sales and marketing scheme that misstated the nature and stability of the auction- rate market.
"In Merrill's case, it's as serious and in a sense more serious because there was a clear effort at manipulation of research, which is even a greater issue than the misleading sales of these auction rate securities instruments,'' he said.
Merrill denies any manipulation of its research.
"Our research reflected the honest belief that auction-rate securities offered higher returns in exchange for less liquidity and noted that market changes had begun to occur,'' Merrill spokesman Mark Herr said.
Brian McNiff, a spokesman for Galvin, said the UBS agreement likely will be announced officially on Monday.
UBS has declined to comment beyond saying it was "consistently working with regulators towards a comprehensive solution for all auction-rate securities investors.''
The agreement came as Europe's biggest computer chip maker, STMicroelectronics , took legal action against Credit Suissefor investing its money in auction-rate securities without asking.