A “Banker’s Dream Market”

From January 2006 to February 2008, UBS submitted support bids in 30,367 auctions for municipal and student-loan securities, and its bids were drawn upon 26,023 times.  On February 13, 2008, UBS decided to stop bidding in the auctions, thereby forcing most issuers to start paying penalty rates.  To avoid paying penalty rates, issuers such as states and municipalities sought to convert their debt to fixed or variable rate debt. According to Massachusetts Secretary of State, William Galvin’s investigation, UBS seized upon this money-making opportunity.

On February 14, 2008, UBS Investment Banker, Seema Mohanty, sent an e-mail to David Shulman, head of UBS AG’s municipal securities group, urging that UBS “leverage” this unfortunate opportunity against its municipal clients. In her e-mail, Mohanty states, “We have a money making opportunity” and in referring to the municipal issuers added, “They are desperate.”  Later that day in an e-mail to a colleague, Shulman acknowledged this opportunity and referred to the ARS debacle as a “banker’s dream market.”  According to Secretary Galvin, “within a day after failing its auctions and leaving investors stuck with instruments that were no longer liquid, UBS seized upon the opportunity to profit from this calamity of its own making.”