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Last week, UBS AG (UBS - Analyst Report) – Switzerland’s largest bank in terms of assets – announced the settlement of a lawsuit filed by the Federal Housing Finance Agency (FHFA), which had accused the former of misrepresenting mortgage-backed securities (MBS). The Swiss banking major shelled out roughly $885 million for the settlement.

FHFA had imputed UBS AG of misrepresenting MBS documents to Federal National Mortgage Association (FNMA), also known as Fannie Mae, and Federal Home Loan Mortgage Corporation (FMCC), popularly known as Freddie Mac. FHFA was appointed the conservator of mortgage investors in 2008, as the downside in the housing sector put investors’ funds in jeopardy.

The settlement comes after a New York federal judge quashed UBS AG’s appeal to dismiss a lawsuit filed against it and other major financial institutions in April.

The Background

In 2011, FHFA sued UBS AG and 17 other banks, accusing them of selling faulty securities worth $200 billion to Fannie Mae and Freddie Mac through misleading statements, which violated the security laws. Out of these banks, Citigroup Inc. (C - Analyst Report) and Bank of America Corp reached settlements with the regulatory body.

UBS AG has been in a legal conflict with FHFA with regard to more than $4.5 billion of risky residential mortgage-backed securities (RBMS) and $1.8 billion of third-party RMBS. The lawsuits claimed losses of at least $1.2 billion along with interest.

Consequences of the Settlement

UBS AG expects CHF 865 million in charges, provisions and writedowns in second-quarter 2013 results, (to be announced on Jul 30) related to the settlement and a Swiss-U.K. tax agreement. Notably, the Swiss bank was fined approximately CHF 1.4 billion in December by regulators in the U.S., the U.K. and Switzerland in relation to the LIBOR scandal.

Additionally, UBS AG has been aggressively seeking cost cuts to counter the tough macroeconomic environment in Europe and stringent regulations. Its cost containment measures include the reduction of investment banking units as well as risky trades and an increased number of layoffs.  

Conclusion

The lawsuit settlement by UBS AG manifests its aim to resolve all mortgage related issues, and thereby reduce costs over the upcoming period. Further, the move is expected to provide relief to the investors who were duped through such risky investments.

UBS AG currently carries a Zacks Rank #4 (Sell).
 

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