The SEC announced today (click here) that it has finalized settlements with Citigroup Global Markets, Inc. and UBS Securities LLC and UBS Financial Services, Inc. that will provide nearly $30 billion to tens of thousands of customers who invested in auction rate securities before the market for those securities froze in February. The SEC stated that the settlements “resolve the SEC’s charges that both firms misled investors regarding the liquidity risks associated with auction rate securities that they underwrote, marketed and sold.” In mid-February 2008, according to the complaints, Citi and UBS decided to stop supporting the ARS market, leaving tens of thousands of Citi and UBS customers holding tens of billions of dollars in illiquid ARS.

SEC Chairman Christopher Cox stated that “Today’s settlements are the largest in SEC history, and represent the largest return of customer money in the agency’s 75 years.”  The SEC said the settlements will restore approximately $7 billion in liquidity to Citi customers who invested in ARS, and $22.7 billion to UBS customers who invested in ARS.

Read that last part again: $22 billion! What does that even mean? Is UBS stroking a check or a series of checks in the amount of $22 billion? It turns out that the answer is no, and that UBS does not expect its cost to be even 5% of that amount.  In a press release from August 2008 (click here), when UBS first announced its settlement with the SEC and state regulators, UBS stated that:
The full cost of the proposed settlement, taking into account the projected redemption
patterns of clients, the difference between the purchase prices and the current market
value of client ARS holdings, and the regulatory fine related to the settlements, is
estimated to be in the range of USD 900 million on a pre-tax basis, to be booked in the
second quarter results. This includes reimbursements to all clients for losses incurred from sales of ARS holdings between Feb. 13 and Aug. 8, 2008.

This $900 million estimate includes $150 million in fines paid to state regulators, meaning that UBS estimates the total cost to it under the SEC settlement to be $750 million.

How does the number get from $22 billion to an expected total cost of $750 million?  I spoke today with UBS spokeperson Karina Byrne, who explained that the far lower expected cost is the result of several factors:

  • Only a percentage of those eligible to participate and receive funds in the settlement from UBS will elect to do so.

  • Nearly half of UBS payments need not be made until the middle of 2010, by which time the ARS market may have improved.

  • Many of the ARS that UBS is offering to repurchase maintain a significant percentage of their market value, meaning that the net cost to UBS is only a fraction of par value.


The $750 million is a pre-tax number, as well, meaning that the total cost may be even less if it can be used as a tax deduction.  Ms. Byrne also explained that UBS will pay for the settlement via "a combination of standard financing solutions involving short and long term debt financing, as well as more specialized structured solutions."

An SEC spokesperson confirmed to me that the SEC considers the amounts of today's settlements to be the larger $22.7 billion (UBS) and $7 billion (Citigroup) figures in its press release.