Opinion

Alison Frankel

Bond insurers drop MBS letter bomb on UBS

By Alison Frankel
December 2, 2011
MBIA | UBS

Last month, as U.S. banks began reporting their third-quarter financials, I noted that the banks had beefed up their disclosure of potential liability for mortgage-backed securities activity. Morgan Stanley revealed that it had received a demand letter from Gibbs & Bruns, the firm that represents the big funds that negotiated the proposed $8.5 billion MBS breach-of-contract settlement with Bank of America. Goldman upped its reported MBS exposure to $15.8 billion, from a mere $485 million in the second quarter. The new emphasis on disclosure, I said, was partly the result of more claims, but also partly due to pressure from the Securities and Exchange Commission and the Public Company Accounting Oversight Board to improve MBS disclosures.

The bond insurers’ trade group, the Association of Financial Guaranty Insurers, has also been agitating for banks to acknowledge their MBS exposure — and particularly their exposure to MBS breach-of-contract (or put-back) claims. In September 2010 AFGI sent a blistering letter asserting that Bank of America’s MBS put-back liability to its members was more than $10 billion. This September the bond insurers targeted Credit Suisse, which, according to AFGI, had failed to account for billions in put-back claims.

Late Wednesday AFGI struck again. The recipient this time was UBS. According to the letter AFGI sent to UBS CEO Sergio Ermotti, the Swiss bank has reported a $93 million reserve for put-back claims in its most recent financial report — even though it has received more than $800 million in put-back claims from just one bond insurer, and that insurer (presumably Assured Guaranty) has indicated its intention of demanding a total of $4 billion in put-backs from UBS.

UBS has included disclaimers about the uncertainty of the volume of put-back claims and its success in rebutting put-back demands, but AFGI asserts the boilerplate language is misleading. “AFGI submits that neither refusing legitimate repurchase requests nor failing to discharge legitimate liabilities constitutes ‘success’ nor in any way reduces or eliminates the liabilities,” the letter said.

The bond insurers also sent the UBS letter to the bank’s regulators, the Swiss Financial Markets Supervisory Authority and the New York State Department of Financial Services, as well as to UBS’s auditor, Ernst & Young.

In a statement, a UBS spokesperson said: “The letter from the AFGI — a trade association for monoline insurers — is inaccurate and we dispute AFGI’s numerous unfounded allegations. In particular, UBS stands behind its financial reporting, including its disclosures and provisions concerning its potential RMBS-related liabilities as entirely appropriate and fully compliant with all legal and regulatory requirements. We take issue with the quality and integrity of the industry loan reviews cited in the letter and note that UBS has received numerous unfounded loan repurchase demands — and these demands are fully reflected in UBS’s disclosures. Moreover, the AFGI’s membership includes ultra-sophisticated insurers that accepted significant premiums to insure risks and that now seek to evade these obligations. Today’s letter adds nothing new, and is merely the latest in a series of efforts by the Association and its members to shift responsibility for their actions.”

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