UBS Pops On Mortgage-Backed Securities Settlement, Earnings Preview

Michael Teague  |

UBS AG (UBS) , Switzerland’s largest financial institution and one of the world’s top foreign money center banks, rose 3 percent ahead of the closing bell on Monday to $19.20 after releasing a pre-announcement of earnings indicating a strong second-quarter performance.

The banking giant announced second-quarter net-income of $734 million, a substantial improvement on the prior year period during which the bank netted $454 million. Estimates had placed earnings at $596 million, and UBS is set to release its full earnings report on the July 30.

The bank’s performance on Monday can be attributed not only to its impressive earnings preview, but to the fact that one the same day, UBS announced that it had settled with the US Federal Housing Finance Agency over its role in the sale of mortgage-backed securities during the 2004-2007 period ended up erasing the wealth of countless middle and lower-income families with the collapse of the housing bubble in 2008.

UBS was the defendant in a 2011 federal government suit over its sponsorship of $4.5 billion in residential mortgage-backed securities, and another $1.8 billion of third-party residential mortgage-backed securities. The suit valued those losses at $1.2 billion before interest.

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The RMBS that were sold to financing agencies such as Fannie Mae and Freddie Mac were revealed to be toxic once the housing market tanked. Later in 2011, 17 other banks were charged in a manner similar to UBS, with co-defendants from among European banks such as Credit Suisse (CS) and The Royal Bank of Scotland ($RBS), as well as US banks such as Bank of America (BAC) , Goldman Sachs (GS) , Citigroup (C) , and JPMorgan Chase & Co. (JPM) . The FHFA was seeking to get back some $196 billion in total losses, and has already settled with Citigroup regarding an estimated $3.5 billion in losses.

Mortgage-backed securities are the result of a process by which mortgages are grouped into complex financial instruments which were poorly understood, in many instances by those who created them, and would turn out to be worthless once the bubble burst. Prior to the crash, Fannie and Freddie were heavily invested in the purchase of bank-issued RMBS, used to facilitate lender-reinvestment in the property market.

UBS did not release specifics about the size of the settlement, which awaits final approval by all parties.

[Image: UBS Sign and Logo, Courtesy of Wikimedia Commons]

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