When UBS sells crap and vomit

By Felix Salmon
September 10, 2009
writes about here. It's a fun read, and I've uploaded it here. Neither of the parties to the case comes out smelling of roses: Pursuit seems to have completely missed the triggers in the CDOs despite two of its principals reading the offering memoranda, and as for UBS, well, the judge puts it very well:

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My colleague Matt Goldstein has got his hands on the judgment in the UBS vs Pursuit case which the WSJ writes about here. It’s a fun read, and I’ve uploaded it here. Neither of the parties to the case comes out smelling of roses: Pursuit seems to have completely missed the triggers in the CDOs despite two of its principals reading the offering memoranda, and as for UBS, well, the judge puts it very well:

The court takes UBS employees at their word when they referenced their Notes, these purported “investment grade” securities which they sold, as “crap” and “vomit”, for UBS alone possessed the knowledge of what their product, their inventory, was truly worth.

I’m not at all sure that Pursuit is going to win this case — this is just a prejudgment remedy asking UBS to put up $35 million in case it loses. The key to the case is insider knowledge on the part of UBS: it seems that senior UBS employees were in close contact with Moody’s and were informed that the CDOs in question were about to be downgraded. Since UBS knew that the notes would be wiped out in the event of a downgrade, they then went to great lengths to sell the CDOs before the downgrade happened.

The judge has thrown out most of the complaints that Pursuit made against UBS, leaving only one or two for UBS to defend; the bank, in turn, has said that it “is confident that it will prevail on the merits of the case”. But even it if does prevail, UBS has been revealed as being extremely sleazy at best. And it would be fair for anybody dealing with the UBS fixed-income desk to assume that they’re being ripped off, and treat any proffered paper with extreme prejudice.

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