Swiss bank UBS has agreed to pay a $1.435 billion settlement to the U.S. Department of Justice (DOJ) to resolve civil claims over its alleged misconduct in dealing with residential mortgage-backed securities (RMBS) prior to the 2008 financial crisis. The settlement was announced by the DOJ on Monday and stems from a civil action filed against UBS in November 2018, a decade after the crisis.
UBS confirmed the payout and stated that the settlement had been fully provisioned in prior periods. The settlement holds UBS accountable for its conduct related to the underwriting and issuance of residential mortgage-backed securities. U.S. Attorney Breon Peace for the Eastern District of New York stated that the substantial civil penalty serves as a warning to other players in the financial markets who seek to profit unlawfully through fraud.
The 2008 financial crisis was triggered by overheating in the housing markets, with banks and lenders approving mortgages to borrowers with poor credit histories. This drove up home prices to astronomical levels, and banks sold risky mortgage-backed securities to other financial institutions. Large financial conglomerates like Bear Stearns, Lehman Brothers, Merrill Lynch, and Morgan Stanley all became lenders of mortgages.
According to a 2018 paper published by the University of California, Berkeley, UBS held onto $50 billion of high-risk mortgage-backed securities by the summer of 2007, while Citigroup held $43 billion, Merrill Lynch held $32 billion, and Morgan Stanley held $11 billion.
The UBS settlement adds to the total amount of civil penalties paid by financial entities over the 2008 crisis, which now exceeds $36 billion. The DOJ stated that the settlement with UBS resolves the final case brought by its working group, which was formed to investigate the conduct of banks and other institutions involved in creating and issuing RMBS.
In conclusion, UBS's agreement to pay a $1.435 billion settlement to the DOJ for its alleged misconduct in dealing with residential mortgage-backed securities represents a significant step towards holding financial institutions accountable for their actions leading up to the 2008 financial crisis. This settlement adds to the substantial amount of civil penalties paid by financial entities in relation to the crisis.