) resolved a lawsuit filed by
Assured Guaranty Ltd.
) in a U.S. district federal court in Manhattan. The Swiss bank
agreed to pay an initial amount of $358 million to settle the
charges levied against it. Further, UBS entered into a
collateralized loss-sharing reinsurance agreement to compensate a
part of future losses incurred by the plaintiff.
In a lawsuit filed against the Zurich-based bank in Feb 2012,
Assured accused it of misrepresenting the quality of the loans
underlining $1.49 billion of mortgage-backed securities (MBS)
insured by UBS.
During 2006-2007, Assured had provided financial guaranty
insurance, which warranted that if cash flows from the mortgages
were inadequate for paying investors their dues, it would cover
those losses. However, a large number of these loans defaulted as
they did not match the standards that UBS had set.
Further, Assured received permission to sue UBS for providing
misleading information to the major rating agencies - Standard
& Poor's (S&P) and Moody's, a unit of
) - as it was a breach of agreement. The company had placed a
condition that MBS should be rated 'AAA' or slightly lower for
receiving guarantees. It alleged that UBS, in an effort to get
higher ratings for these risky MBS, offered fraudulent data to
the rating agencies.
Earlier, in Aug 2012, a U.S. district judge dismissed part of the
litigation under which Assured demanded that UBS should
repurchase $1.6 billion worth of these faulty mortgages. However,
Assured was granted sanction to proceed with the rest of the
Legal Woes Continue
Trouble has been brewing for major banks in recent times due to
fraudulent representations and breaches of contract. These banks
face several other charges related to the sale of defective
Litigation overhangs have been a common problem for these banks
since the financial meltdown. In effect, these litigations are
expected to cause huge expenses, tarnish their reputation and be
an overhang on the financials over time. However, the measures
being undertaken by the regulatory and legal authorities to come
down hard on such unwarranted activities will provide huge relief
to the affected investors and other financial institutions.
With the settlement of the lawsuit, UBS plans to move forward
with its business strategies. However, pending lawsuits can
further trigger financial hassles while tarnishing the company's
image. Therefore, it is in the interest of the company to resolve
such matters at the earliest.
Currently, UBS carries a Zacks Rank #3 (Hold). Better performing
foreign banks include
Deutsche Bank AG
), which carries a Zacks Rank #2 (Buy).
ASSURED GUARNTY (AGO): Free Stock Analysis
DEUTSCHE BK AG (DB): Free Stock Analysis
MOODYS CORP (MCO): Free Stock Analysis Report
UBS AG (UBS): Free Stock Analysis Report
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