UBS Auction-Rate Buy Leaves Some Investors Out in Cold

The hits just keep coming for the private client division of UBS. Things are so bad the Joe Grano, the former bigshot at PaineWebber, would probably not be interested in participating in a buyout of the franchise, should UBS seek to sell it for a song.

The tax scandal is bad enough, but over 15 class action lawsuits are being brought on behalf of UBS clients. UBS announced everyone would be made whole, but it is not proving to be that simple:

UBS AG, Switzerland’s largest bank, plans to buy back as much as $3.5 billion of auction-rate preferred shares after being sued in the U.S. for fraudulently selling the securities as low-risk alternatives to cash.

Clients holding the securities in UBS accounts will be able to get their money back in full, the Zurich-based company said yesterday. The offer, the first by a broker, applies to shares issued by tax-exempt closed-end funds managed by firms such as BlackRock Inc. and Nuveen Investments Inc. It doesn’t include auction-rate debt from municipalities or student-loan providers.
Bloomberg

Initial reactions to the news were of relief:

``It’s fabulous,’’ Harry Newton, 66, an investor in New York who owns $3.5 million in auction-rate preferred securities, said about UBS’s decision. ``They were the worst of all the brokerage companies that sold this stuff.’’

This debacle has been overshadowed by bad news everywhere else, but has certainly contributed to the bewilderment on Main Street over what exactly is going on with banks and brokers. The IndyMac news threw more fuel on the fire; near panic has been the order of the day. Main Street is confused, and for good reason.

An old friend of mine was caught up in the machinations at UBS. After saving diligently for over 10 years she had finally accumulated a quarter million dollars to be used as a down payment for a house in Southern California.

A UBS rep got her to move her money from her longtime Washington Mutual branch a a year ago; but ultimately she had little contact with the asset gathering broker. He invested the funds in auction rate securities, telling her they were as good as cash, even as she explained that she was house hunting and would need to access the funds.

Several months later she submitted an offer an a house, and tried to pull a chunk of the money out to make the deposit and down payment. Only at this time was she told what had happened, and UBS offered to given her a loan against the securities, but was less than forthright about the economics.

She passed on the offer and walked away from the house; too bad considering she was well qualified and ready to buy from a motivated seller. The housing market is getting hit from a perfect storm.

I called her yesterday to email her a link to the story in Bloomberg. Since she had no debt from municipalities or student loans we thought she could see the light at the end of the tunnel.

Unfortunately question marks remain, given the email I just received back from her:

i was just told that they are only buying back the non tax ones since only 75% of them have paid out.  apparently it’s a lottery that the companies like the ones i own, ING, DNP and cohen & steers are cashing out by cusip number.  i now have to call each company and bitch--are they really “randomly” selecting cusip numbers or cashing out people they know and call to bitch!!

If anyone you know is caught in this situation make sure they go on the offensive if they have auction rate debt at one of the big mutual fund complexes. Waiting for them to contact you might not be so prudent, lottery or not.

And while an apology would be nice, getting your money back would be better.
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UBS Seeks to Appease Clients With Auction-Rate Buy
Bloomberg

UBS RAISES ADVISER PAY TO KEEP ITS TALENT
NY POST

UBS used ‘cloak of secrecy’ on US tax
FT
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