UBS Will Pay $35 Million To Redeem Auction-Rate Securities Sold To Massachusetts' Cities
UBS AG will pay approximately $35 million to approximately 20 Massachusetts towns and cities that invested in the auction rate securities market. As reported by Forbes.com, the Swiss banking giant confirmed that it has entered into an agreement with the State of Massachusetts to return the amount of the investments. Massachusetts had been investigating UBS for misleading towns, cities, and other municipal entities by representing that auction rate securities were permissible investments under state law. That investigation began in February 2008.
The 20 or so municipalities that will be receiving the $35 million back from UBS invested from their general fund, which is regulated by a state municipal finance law that strictly prescribes what kind of investments can be made. According to Massachusetts Attorney General Martha Coakley, UBS misled the municipalities by representing that the securities were permissible investments under state law when in fact they were not.
An auction rate security is a debt, such as a bond, whose interest rate or dividend is reset during an auction. Auction rate securities have been frozen over the last several months due to lack of market liquidity resulting from the fact that the auctions are no longer occurring. Therefore, holders of auction rate securities have no place to sell them, and instead must hold them until maturity in order to avoid losses. The agreement between Massachusetts and UBS will allow the municipalities to recover their invested funds without continuing to hold the securities. Essentially, UBS agreed to repurchase the principal investments at par value.
UBS has already had to write down over $37 billion since the beginning of the US subprime mortgage crisis. In its most recent quarter, it posted a loss of $11.5 billion Swiss francs. UBS has also stated that it plans to exit the tax-exempt bond business.
