UBS and Merrill Pay to Make it Go Away

Following Citi's lead yesterday, UBS settled with federal regulators in the auction-rate securities probe.  UBS has agreed to pay $150 million in fines and will bailout retail investors (details are yet to be announced, update to come).  Merrill Lynch has also announced that it will buy back auction-rate securities from its clients over a one-year period beginning January 15, 2009.  The total amount that Merrill will repurchase is expected to be between $10 and $12 billion.  I'm certain that other investment banks who sold auction-rate securities to retail investors will more than likely follow suit.  Sometimes it is just easier to pay to make a problem go away than risk damaging your reputation with clients.  In the grand scheme of things, paying a $100 million fine and maybe a couple of hundred million more to eat losses, is really a drop in the bucket when you are losing billions of dollars a quarter in MBS, CDOs, CDS...etc.  Furthermore, you don't want to lose your loyal retail investors because you will need them when the next bubble rolls around in another couple of years.  It's much easier to pump and dump when you have "dumb money" in the kitty.  The "smart money" falls for the routine too, but they usually can't get away with suing you because they were an "unsuitable" investor.  They are just more than likely to yank their money because they are mad and take it to another broker, who is going to do the exact same thing.  But the "dumb money" is loyal to a fault, as long as you keep bailing them out...   

Update: Details of the UBS settlement with the New York AG, the Massachusetts Securities Division and the SEC: UBS will buy back $8.3 billion in securities from private clients for two years starting Jan 1, 2009 and $10.3 billion from institutional investors starting June 2010.  It will pay the $150 million fine without admitting or denying guilt.  UBS estimates it will cost $900 million, which will be booked in second-quarter results.