UBS to buy back stricken debt securities

By Jason Szep

BOSTON (Reuters) - UBS AG (UBSN.VX)(UBS.N), Switzerland's largest bank, agreed on Friday to buy back $18.6 billion of debt securities whose value collapsed during the global financial crisis and to pay $150 million 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 Inc (C.N) and Merrill Lynch & Co Inc MER.N announced they would buy back almost $20 billion 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 $330 billion market collapsed in February, freezing the assets, as the credit crunch worsened.

Signaling a possible deepening in the legal fallout, the Bank of New York Mellon Corp (BK.N) said one of its units was under investigation by U.S. 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 $19.4 billion, details from UBS showed the bank will purchase $8.3 billion of the securities from clients beginning on October 31 and all or any remaining $10.3 billion held by institutional clients beginning in June 2010.

That is in addition to $3.5 billion 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 $900 million 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 $1.8 billion. UBS has taken $37 billion 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 U.S. Securities and Exchange Commission and other states requires UBS to pay a fine of $150 million -- 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 U.S 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."