Group results

Following the significant disruption which occurred in the US market for auction rate securities (ARS) in early 2008, UBS has been seeking to address problems arising from this development. The majority of ARS remain illiquid with auctions continuing to fail, however, and clients are generally unable to sell their securities. On 8 August 2008, UBS entered into a settlement, in principle, with the New York Attorney General (NYAG), the Massachusetts Securities Division, the Securities and Exchange Commission and other state regulatory agencies represented by the North American Securities Administrators Association to restore liquidity to all remaining clients’ holdings of ARS. Under the agreement in principle, UBS has committed to purchase a total of USD 8.3 billion of ARS, at par, from most private clients during a two-year period beginning 1 January 2009. Private clients and charities holding less than USD 1 million in household assets at UBS will be able to avail themselves of this relief beginning 31 October 2008. In addition, UBS has agreed from June 2010 to purchase all or any of the remaining USD 10.3 billion of ARS, at par, from its institutional clients. UBS also will provide loans at no net cost to private clients for the par value of their ARS holdings starting in mid-September 2008, and will provide liquidity solutions to institutional clients.

This agreement follows, and is in addition to, UBS’s recent announcement that it intends to develop a trust structure that would have the ability to purchase approximately USD 3.5 billion in tax-exempt auction preferred stock, a type of ARS, at par from clients. UBS has also agreed to pay fines totalling USD 150 million to state regulatory agencies, and will be required to reimburse all clients for losses incurred from sales of ARS holdings between 13 February 2008 and 8 August 2008.

In connection with these matters, a provision of USD 900 million (CHF 919 million) is included in UBS’s second quarter 2008 results. As a result of the agreement to repurchase ARS, UBS is exposed to additional credit and market risk, including interest rate risk, and will book an immaterial increase in risk-weighted assets. Substantial ARS repurchases would also offset to a degree UBS’s efforts to reduce its balance sheet size. The ultimate impact on UBS of the repurchase obligations is difficult to predict and will be affected by a number of factors including the timing of repurchases and possible restructurings and redemptions of ARS.

The portfolio of ARS that UBS has agreed to purchase from private clients and charities, based on par values at 31 July (excluding tax-exempt APS to which the proposed trust structure relates), is composed of student loan ARS (34%), municipal ARS (32%) and APS (34%). On the same basis, the portfolio held by institutional clients is much more heavily weighted to student loan ARS (91%), with municipal ARS constituting 6% and APS 3%. Based on credit ratings, the student loan ARS held by UBS clients is generally of higher quality than that currently held by UBS. At 30 June 2008, UBS had approximate net exposures of USD 8.3 billion in student loan ARS, USD 0.5 billion in municipal ARS and USD 0.3 billion in APS. For further details on UBS’s existing inventory of student loan ARS positions as of 30 June 2008, see the discussion on exposure to student loan asset-backed securities of the “Risk management and control” section of this report.