UBS Cuts 5% From Clients' Auction-Rate Bond Valuation (Update3)
By Adam L. Cataldo and Martin Z. Braun
March 28 (Bloomberg) -- UBS AG has cut the value of the auction-rate securities its customers have in their accounts by about 5 percent following more than a month of market upheaval.
``This is the right thing to do,'' said Michelle Creeden, a UBS spokeswoman, in a prepared statement. ``It is in the best interest of our clients to provide them full transparency regarding their account. Given current market dislocations, this is the next logical step for any committed wealth manager.''
UBS will inform clients of the reduced value of their holdings via their online statements, Briefing.com said, citing a Dow Jones report. UBS customers had maintained full value without any discount that could reflect bondholders' inability to sell their holdings.
UBS's action comes after auction-rate bond failures rose to about 71 percent this week, up from about 69 percent last week, according to data compiled by Bloomberg. The $330 billion auction-rate securities market originally attracted borrowers by offering financing for 20 years or more at variable costs determined through periodic bidding.
Auction-rate bonds have interest rates determined through bidding run by dealers every seven, 28 or 35 days. When there aren't enough buyers, the auction fails and rates are set at a predetermined level set in documents when the bonds were issued.
``The fact that they aren't worth par or may not be worth par is not going to be acceptable to any owners of these securities,'' said Gary Miller, a partner at the Houston law firm of Boyar and Miller. ``It's certainly not acceptable to me.''
Couldn't Cash Out
Miller invested $750,000 from the sale of his house in auction-rate securities with UBS last December. After signing a contract on a new home, Miller said he called his broker to cash out of the securities and was told he couldn't. When he bought the debt, Miller said he asked his broker whether there had ever been an unsuccessful auction.
``The answer was, `No, there's never been a failure in the auctions,''' Miller said. He has sold $300,000 of his holdings. He still owns $450,000 of auction-rate preferred securities and municipal bonds.
UBS' action ``would appear to be acknowledgement'' that the auction-rate securities they sold to their customers are worth less than they claimed, said Jonathan Levine, an attorney with the San Francisco law firm of Girard Gibbs LLP. Levine filed a class-action lawsuit against UBS on March 21, listing as named plaintiffs a San Diego retiree couple who it says owned $1 million of the securities. The suit accuses the firm of telling investors the bonds were the same as cash or a money market fund equivalent.
``These securities were not safe, liquid, riskless cash- equivalent investments as they were represented to be,'' Levine said.
To contact the reporters on this story: Adam L. Cataldo in New York at acataldo@bloomberg.net; Martin Z. Braun in New York at mbraun6@bloomberg.net.
Last Updated: March 28, 2008 19:16 EDT |
