UBS announced Monday that it has reached an agreement with federal regulators over defective mortgage-backed securities it sold during the lead-up to the financial crisis.
The bank did not disclose how much it would pay to settle, but it said in its preliminary second-quarter earnings report that it has set aside $748 million for claims related to that line of business.
The Federal Housing Finance Agency oversees mortgage-
finance companies Fannie Mae and Freddie Mac, which bought the securities from UBS. The agency confirmed that “there is agreement in principle,” but spokeswoman Corinne Russell said that “nothing is final.”
The Swiss banking giant is not alone in its troubles with the FHFA, which has pursued 18 financial institutions for allegedly misleading and selling defective mortgage-backed securities to Fannie Mae and Freddie Mac. In its lawsuit against UBS, the FHFA was seeking to recoup losses of at least $900 million.
If approved, this will be the third settlement the FHFA has reached with a major financial institution, including General Electric and Citigroup. The size of those settlements was not disclosed.
“The first ones are always the hardest to get. Now that they got the first ones, you start to see a precedent being established, and the other ones are falling in line,” said Tim Rood, a former Fannie Mae executive and currently partner at the Collingwood Group, a financial and housing advisory firm. “They are all generally accused of the same thing, so I think it will be easier for other defendants in these suits to rationalize settlements.”
In total, UBS said it is setting aside $924 million for litigation costs. About $748 million of that amount is being set aside for its investment banking businesses that sold mortgage-backed securities to Fannie Mae and Freddie Mac. It is also setting aside $107 million to cover the cost of an agreement between Britain and Switzerland to tackle tax evasion.
UBS’s agreement with the FHFA was welcomed by investors. UBS shares gained 3.2 percent on the New York Stock Exchange on Monday, closing at $19.24. It is up more than 20 percent this year.
Its share price was also boosted by the company’s announcement of its preliminary second-quarter results, which were better than analysts had forecast. Its operating profit reached more than $1 billion during the quarter, the company said. The results reflect “significant progress in the execution of its strategy,” the company said in a statement.
With “another piece of litigation out of the way,” Mediobanca analyst Christopher Wheeler said that “UBS is clearly ahead of the game”.
The FHFA is likely to settle with more banks this year, analysts said.
“If you look at the FHFA’s more recent patterns, they are looking for settlements; they are not looking for drawn-out court battles. . . . They want to put this issue to bed by 2013. More settlements along the lines of the UBS or the City ones seem consistent with that objective,” Rood said.