Boston - UBS AG, Switzerland's largest bank, agreed on Friday to buy back $18.6bn of debt securities whose value collapsed during the global financial crisis and to pay $150m to settle charges it misled investors.
The settlement, the largest in a nationwide probe into whether banks sold bonds that were riskier than advertised, followed a day after Citigroup and Merrill Lynch & Co Inc announced they would buy back almost $20bn of the so-called auction-rate securities between them.
UBS and other banks had marketed the securities as safe and liquid as cash, but those who bought them have been unable to access their money since the $330bn market collapsed in February, freezing the assets, as the credit crunch worsened.
Signalling a possible deepening in the legal fallout, the Bank of New York Mellon Corp said one of its units was under investigation by US regulators over the securities.
A number of other institutions were also under investigation, North American securities administrators association president Karen Tyler told a news conference. She declined to identify them, but urged banks to "step up and do the right thing for their investors."
While Massachusetts earlier put the total buy-back amount at $19.4bn, details from UBS showed the bank will purchase $8.3bn of the securities from clients beginning on October 31 and all or any remaining $10.3bn held by institutional clients beginning in June 2010.
That is in addition to $3.5bn of tax-exempt auction preferred stock the bank said it would repurchase in July.
Including fines and write-downs of auction-rate debt it will redeem, the settlement will cost the Swiss bank $900m before taxes, which it will book in second-quarter earnings, UBS said in a statement.
Earlier in the day, analysts estimated the write-downs would amount to as much as $1.8bn. UBS has taken $37bn of write-downs since the credit crisis began, making it the hardest hit bank in Europe.
"Deliberate effort"
The settlement with Massachusetts, New York, the US Securities and Exchange Commission and other states requires UBS to pay a
fine of $150m - half to New York and the remainder split between other state regulatory bodies.
Massachusetts secretary of state William Galvin said problems in the arcane auction-rate securities market affected investors
nationwide and likely damaged the US economy.
"This was not a mutual mistake by financial services companies. This was a deliberate effort to ensnare consumers with great damage," Galvin said in a telephone interview.
A UBS statement did not admit or deny any wrongdoing in the settlement.
The settlement covers 80 000 individual investors, New York state attorney general Andrew Cuomo said, describing the situation as "intolerable."
"Investors have been locked in a nightmare with these securities," he told a news conference.
The SEC said it could still fine UBS after the bank had fulfilled the terms of the deal.
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 US Securities and Exchange Commission on Friday that the SEC was investigating auction-rate transactions involving its Mellon Financial Markets LLC unit.
It said the unit was cooperating.
Cuomo said Merrill Lynch had not fully responded to the problem. Galvin plans to proceed with a similar complaint against Merrill, accusing the bank of a misstating the stability of the market and manipulating research.
Merrill denies any manipulation of 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 spokesperson Mark Herr said.
- Reuters