UBS to buy back $19.4 billion in Auction Rate Securities: Who will be next?

Posted Aug 8th 2008 9:17AM by Peter Cohan
Filed under: Citigroup Inc. (C), Bank of America (BAC), Merrill Lynch (MER), Goldman Sachs Group (GS), Morgan Stanley (MS), Wachovia Corp (WB), Lehman Br Holdings (LEH)

After nearly six months of stalemate, things are finally starting to happen for holders of Auction Rate Securities (ARS) -- the $330 billion of long-term debt whose yield used to reset in weekly auctions. This morning, The Boston Globe reports that UBS AG (NYSE: UBS) is poised to announce that it will redeem $19.4 billion worth of ARS and pay $150 million in fines, split between Massachusetts and New York. UBS follows Citigroup, Inc. (NYSE: C) and Merrill Lynch & Co., Inc. (NYSE: MER), which yesterday announced plans to redeem over $17 billion worth of ARS.

Why should you care? If you have money frozen in these securities, the reason is obvious. If not, what's happening here suggests three lessons for investors:

Don't buy without knowing. Before you buy anything a broker is trying to sell you, read the prospectus, find out how the broker will be compensated for the sale, and if you don't understand what you're buying, don't buy it. Many people bought based on broker pitches that ARSs were cash equivalents, highly liquid, and yielded slightly more than money market funds. It turns out that ARS auctions started failing publicly last September.
If your money becomes illiquid, make alot of noise. ARS investors contacted government officials and the media in an organized way. The public attention led to investigations by legal officials. That attention uncovered UBS e-mails demonstrating that brokerage firms decided to dump the toxic waste from their own books to the accounts of their individual customers -- even as their executives dumped the securities from their own portfolios.

Don't give up. The announcements this week sound good. But until all the ARS holders get their money back with interest and penalties, they are just announcements. Unfortunately, in many cases it will not become clear until some time next year whether these announcements are just a public relations ploy. ARS victims will need to keep at it until they get all their money back.

Yesterday I posted a top 10 list. Here are the seven companies -- the volume of their 2007 municipal ARS issuance is in parentheses -- that have yet to announce their settlement deals:

Morgan Stanley (NYSE: MS) ($5.2 B)
JPMorgan Chase (NYSE: JPM) ($5.2 B)
Goldman Sachs (NYSE: GS) ($4.3 B)
Bank of America (NYSE: BAC) ($3.7 B)
RBC Capital Markets ($1.2 B)
Lehman Brothers (NYSE: LEH) ($1.1 B)
Wachovia (NYSE: WB) ($0.6 B)

Will this public attention on Citi, Merrill, and UBS force them to make amends as well?

Update. This afternoon, CNNMoney reports that UBS will buy back only $18.6 billion worth of ARS -- $800 million less than the Boston Globe reported this morning. And UBS will extend the pain for those waiting for redemption. According to CNNMoney, "Under the agreement, the Swiss bank will buy back $8.3 billion from individual investors and charities during a two-year time period beginning Jan. 1, 2009. The company also will purchase, beginning in June 2010, all or any of the remaining $10.3 billion held by institutional clients." The Globe got the $150 million fine part right.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He owns Citigroup stock and has no financial interest in the other securities mentioned.

Tags: auction rate securities, AuctionRateSecurities, BAC, C, featured, GS, inthenews, JPM, LEH, MER, MS, UBS, WB

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Reader Comments (Page 1 of 1)

8-08-2008 @ 10:23AM

Carl said...

How many of these white collar ho's will be thrown in jail for more than a wrist slap.

Gee, a few hundred billion of fraud, seems small compared to the CDO and SIV fiasco.

So, the banks repay their customers and pay fines, all bye the way out of their earnings, where the hell are the regulators and where is top management of UBS, Merrill, Citi, etc. when are heads going to roll ?

8-08-2008 @ 11:32AM

Chris K. said...

Peter,
My favorite sport on bloggingstocks.com is criticizing your writing, especially when your writing is politically motivated.

Your coverage and writing about the ARS fiasco, however, has been both informative and interesting and warrants praise. Good job.

8-15-2008 @ 2:02AM

Kimberley said...

I hear the sound of heads rolling (off of the shoulders of the lower management employees) and the ch ching of the bills piling up around them as hey search for gainful employment. How many more must lose thier livlihood due to mismanagement by those higher up? It is positively sinful what's going on with this!