UBS and Auction Rate Securities (A, B, C)

Authors: Bergstresser, Daniel B.; Cole, Shawn; Shenai, Siddharth
Source: Harvard Business School
Year: 2009
Company Name: UBS
Number of pages: 22, 4, 2

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Abstract:

UBS, a global financial services company, must decide whether to continue to support the market for Auction Rate Securities in the face of a growing financial crisis. These instruments, underwritten by UBS, were marketed to clients as highly liquid and safe alternatives to cash. UBS' decision becomes urgent when Citigroup, another leading underwriter of ARS, decides to let their auctions fail, leaving clients with illiquid assets of uncertain value. The case explores theoretical and practical aspects of liquidity risk, and challenges students to evaluate the benefits of honoring implicit commitments to customers against the costs of acquiring billions of dollars in illiquid assets. The (B) and (C) cases consider the implications of UBS decision.