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UBS facing probe over sub-prime mortgage investments

Swiss bank may have inflated prices of securities despite drop in valuations

CHICAGO – UNITED States government prosecutors are investigating whether Swiss banking giant UBS misled investors by reporting inflated prices of mortgage-backed securities it held despite knowing those valuations had eroded, The Wall Street Journal reported last Saturday.

The Journal, quoting unnamed sources familiar with the probe, said the investigation by the US Attorney for the Eastern District of New York had not yet issued subpoenas.

But the sources noted that the New York prosecutors work closely with the US Securities and Exchange Commission (SEC).

The SEC recently expanded its own probes of both UBS and Merrill Lynch over the pricing of mortgage securities, a move which empowers the SEC to issue subpoenas, they said.

UBS was not immediately available for comment. A Merrill spokesman had no comment.

UBS, Europe’s hardest-hit bank from the credit crisis, last week raised its sub-prime write-downs to US$18.4 billion (S$26.1 billion).

Last Friday, the bank also urged its shareholders to dismiss a plan from some dissenting shareholders demanding an external probe into the bank’s sub-prime woes.

The US Justice Department last Wednesday said it was looking into whether fraud had occurred in the packaging and selling of complicated mortgage-related securities like collateralised debt obligations (CDOs), the Journal said.

The Federal Bureau of Investigation is looking at 14 unnamed companies in that probe, the agency said.

Last Friday, the top securities regulator in Massachusetts filed a civil complaint against Merrill, accusing the brokerage of selling unsuitable sub-prime mortgage-related securities to the city of Springfield.

Massachusetts Secretary of State William Galvin seeks to take away Merrill’s profits from a transaction in which it sold CDOs to the city. Merrill invested about US$14 million of the city’s money in CDOs last year, only to see most of the value erased.

Separately, the city of Springfield said last Thursday that Merrill had agreed to pay it US$13.9 million after determining that the city had not approved the purchase of the CDOs.

UBS remains under fire at home.

Shareholder advocacy group Ethos in December called for more clarity from UBS over its sub-prime losses, adding that there should be an independent probe.

But UBS has said there is no need for a separate investigation, as the country’s banking watchdog, EBK, is already probing the reasons behind its losses.

UBS last week stunned investors with its third round of sub- prime write-downs.

It reported heavy fourth- quarter losses and a 2007 net loss of 4.4 billion Swiss francs (S$5.8 billion).


Source: REUTERS (The Straits Times 4 Feb 08)

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