Corporate Governance

UBS Agrees to Repurchase Illiquid Auction Rate Securities from Massachusetts Municipal Entities

By Jim Hodgson

As we have been discussing, the market for Auction Rate Securities (ARSs) froze up in mid-February of this year -- leaving investors largely unable to unload these debt securities at anything approaching fair market value. A number of Massachusetts municipalities and other entities got stuck holding illiquid ARSs, which they were using to finance public works projects. According to a recent article in Securities Law 360 (subscription required), The Massachusetts Turnpike Authority; the towns of Andover, Merrimac, Hudson, and Winchester; and the cities of Holyoke and Chicopee were all left holding ARSs.

These Massachusetts entities purchased their ARSs through UBS, which apparently marketed the ARSs as permissible investments for municipal entities under Massachusetts law. In response to the ARS crisis, the Massachusetts attorney general, Martha Coakley, stepped in and questioned UBS about its investment recommendations. UBS promptly agreed to return the $35 million that these municipal entities had invested in ARSs by repurchasing their securities at par value.

While this is a great result for the Massachusetts entities and municipalities involved, UBS was quick to caution that ?the reasons supporting this agreement apply only to the circumstances of this specific case.?  UBS explained that individuals do not share the same protection under Massachusetts law -- leaving individual investors with little recourse against marketers of ARSs. What these investors do have are billions of dollars worth of illiquid securities that, oftentimes, were represented as being no riskier than money market accounts.

Full post as published by PomTalk on May 08, 2008 (boomark / email).