The New York Times reports that Massachusetts secretary William Galvin has subpoenaed some revealing e-mails from UBS AG (NYSE: UBS) that illustrate its decision to stick retail investors with its worthless ARS inventory.
I've been following the $330 billion ARS market since February when the weekly auction market for resetting their yields seized up. Since then 4,852 comments have been posted from individual investors whose money is frozen in ARS limbo.
The e-mails reveal that UBS's corporate customers did not want to buy the ARS on UBS's books. So UBS tried to unload the worthless securities onto its individual customers. Absent dumping the ARS, UBS would need to take the hit itself. Rather than do that, UBS decided to let those foolish enough to fall for the ARS sales pitch to take the losses. The Times illustrates this decision clearly in an e-mail from Joe Gallichio, a managing director in the municipal finance department at UBS, on February 21, after the ARS market had frozen.
Here is the e-mail:
As things change they also remain the same. What we face now in the firm as related to muni short term is classic Wall Street. In its core, it is trading versus sales, risk management versus client franchise.
As a firm we tell people we are client focused. So if the client is always right, then we should fix the problem this product has created in WM. [UBS's wealth management unit, which includes retail investors.] To let WM and the firm as a whole go through costly litigation, the loss of investor confidence and significant assets, the cost in management time, legal and compliance, IT spend, the total distraction from our core growth strategy and overall employee morale - will certainly be in excess of the multibillion-dollar hit to balance sheet we would take by just buying the rest of the assets from WM. I just don't get it.
Gallichio's e-mail really says it all. After reading it, I wonder why anyone would ever deal with a stock brokerage. Is there really that big of a need to pay a commission to a brokerage to unload its biggest financial mistakes onto you, the customer?
Let's hope that UBS ends up paying for its conduct.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter
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Reader Comments (Page 1 of 1)
6-28-2008 @ 10:35PM
Kathy said...
Kudos to Peter Cohan, for telling the truth about investment bank fraud. The community that has developed from your Feb. 27 column has helped me deal with the ARS crisis that UBS put me into. I'm learning and fighting back.
As for being "foolish enough to fall for the ARS sales pitch" -- yeah, I guess I'm guilty of falling for the con. Silly me -- I thought my "financial advisor" was more than a salesman. Sadder but wiser now.
6-28-2008 @ 11:12PM
JP said...
Hope you win your case. :)
6-28-2008 @ 11:28PM
Beltway Greg said...
For any number of reasons your brokerage firm doesn't want to ever speak to you again. It is their intent to put your money into one of those managed assets account so that your individual broker never has to speak to you again about individual stocks. Of course you can buy an ETF and do just as well. Most individual investors should never be anywhere near the market-they just don't understand it. I can teach you everything you need to know about the market in about a week except, and this is crucial, behavior. To thrive and survive in the market you need to be a reptile. Never get too hot or too cold. Move very little and eat when you're given the opportunity. Don't waste too much energy chasing a stock/food source that doesn't justify the effort. See you in the jungle.
Beltway Greg
6-29-2008 @ 9:38AM
Michael Yap said...
Banks and brokers business are based on trust. The last decade has seen this erosion as they put more emphasis on meeting those ratios and paying their staff incentives that drive the numbers. Obviously, we are talking about greed and then all other creedos do not mean a thing. Nothing new in this crisis until we decided to fix this by perhaps assigning a value to honesty and decency - both are needed to restore trust.
6-29-2008 @ 11:46AM
lily said...
Honesty and decency are two words that are not in these FA and investments banks vocabulary.
As far as foolish, who would ever in a million years dream or imagine that a bank could freeze your money and then torture you daily. This is like a slow death for some and these people without life or breath should pay dearly for their crimes.
Lord help us all because thanks to their greed, they have ruined alot of peoples dreams. Shame on our broken system for letting this even happen in the first place.
7-13-2008 @ 12:43AM
Serge Birbrair said...
I love UBS Bank, the bank will surely make you a millionaire..if you are a billionaire.
http://sergebirbrair.com/UBS.html