Swiss banking giant UBS AG agreed on Friday to buy back nearly US$20 billion in auction-rate securities from investors, a day after Citigroup Inc reached a similar settlement with regulators for US$7 billion as part of a wide-ranging investigation into the collapse of the market for the bond-like investments.
UBS will repurchase all US$18.6 billion of the securities it sold and pay a fine of US$150 million as part of an investigation led by New York Attorney General Andrew Cuomo into whether banks misled customers about the safety of the securities.
Cuomo said in an interview that his investigation into the troubled securities is continuing.
Of the two settlements reached in as many days with UBS and Citigroup, he said: “We tend to start with the largest because that can make the greatest impact.”
As part of its settlement announced on Thursday, Citigroup will also pay fines of US$100 million.
The bond-like investments were widely held by many institutional and individual investors and were seen as highly liquid, money market-like investments. However, the market for them collapsed in February amid the downturn in the broader credit markets.
“What we’ve established is the institutions are responsible,” Cuomo said. “People will get their money, and get it back in the immediate future.”
More than 80,000 investors nationwide will be affected by the two agreements.
UBS agreed to repurchase all of the auction-rate securities it sold to retail customers, charities and small and mid-size businesses beginning Jan. 1. That group holds about US$8.3 billion in securities. Within that group, customers with less than US$1 million in assets at UBS will be able to sell the securities back to the bank beginning Oct. 31.
The bank will begin repurchasing securities from institutional investors — worth a total of about US$10.3 billion — beginning in June 2010.
Any customers who sold the securities at a loss after the market failed on Feb. 13 will be reimbursed.
The settlements with UBS and Citigroup provide parameters to other banks on how to resolve situations surrounding their sales of auction-rate securities, Cuomo said.
Bank of America Corp and Bank of New York Mellon Corp have both disclosed they received requests for information about the sale of auction-rate securities, and Merrill Lynch & Co has said it would voluntarily repurchase US$12 billion of the securities from clients.
Cuomo noted Merrill’s repurchase program falls short of the steps agreed to by UBS and Citigroup, and his office will continue to investigate the bank.
Both UBS and Citigroup will take charges tied to the repurchase of the securities because they will be forced to price them at their current market value and not at the par value being paid to repurchase them.
UBS said it would take a charge of about US$900 million on a pretax basis based on the difference between the par value of the securities and their current market values and the cost of the regulatory fine.
Half of the US$150 million fine will go to New York, which led the investigation and where UBS’s US headquarters are located. The other half will be distributed to other states, including Massachusetts and New Hampshire.
In reaching the settlement, UBS did not acknowledge any wrongdoing.
UBS will record the charge in its second-quarter results, which are scheduled to be released on Tuesday.
Citigroup said it would take a pretax charge of about US$500 million because of its settlement.
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