UBS added injury to annoyance this afternoon, announcing that it is going to mark down the value of auction-rate securities held in client accounts. As we described here, ARS’s are a formerly little-known corner of the bond market that was once considered a form of cash on steroids, but has recently seized up as liquidity has been sucked out of the room.
The problem for UBS’s clients–and, soon, undoubtedly, UBS’s attorneys–is that Auction Rate Securities were often sold as just a higher-yielding form of cash. As a result, many of the UBS clients about to get walloped by the writedowns likely believed that their spare cash was being held in, well, cash. And the rest no doubt dismissed whatever ARS risks UBS told them about as worth taking–but will now try to hold UBS responsible for their decisions.
The lesson: As UBS and other firms’ clients (and, most likely, their brokers) are now being reminded, “cash-like” securities are NOT “cash.” Let the lawsuits begin.