From The Sunday Times

February 24, 2008

Germans accuse UBS of sub-prime ‘mis-selling’

John Waples

ONE of Germany’s biggest financial institutions is to sue UBS, the Swiss banking giant, claiming it was mis-sold hundreds of millions of pounds worth of sub-prime securities.

The action is expected to trigger a wave of similar lawsuits across world financial centres as institutions seek recompense for losses incurred from buying complex financial instruments that are now worth a fraction of their original price. It will also heap further pressure on Marcel Ospel, UBS’s embattled chairman, to resign.

Sources familiar with the situation say HSH Nordbank, which has assets of €207 billion (£155.8 billion) and is the world’s largest provider of shipping finance, is to take legal action against UBS to recover up to €500m that was lost in a vehicle, set up six years ago, called North Street 4.

At the time, this contained a basket of synthetic collateralised debt obligations, otherwise known as CDOs. Around 70% of the debt was corporate and the rest was exposed to the US sub-prime

CDOs became one of the hottest financial instruments of the last boom, and what started as a $157 billion (£79.8 billion) market in 2004 grew to more than $2 trillion at the start of last year.

UBS has also been one of the hardest hit from the fall-out from sub-prime. It has since been forced to write down $18.4 billion from its own exposure to these mortgages.

Now it faces action from banks it sold them to. UBS arranged at least nine North Street transactions with a combined value in excess of $15.6 billion.

When the German bank approached UBS earlier this decade, it was keen to diversify its investment portfolio. It had excess regulatory capital and wanted exposure to a safe international credit portfolio.

But now those close to HSH say it believes UBS sold an investment portfolio that contained substantially higher risk than was explained at the time.

It claims the CDOs were mis-sold and mismanaged because UBS substituted products that were put into NS4 without proper explanation to its clients.

Sources close to HSH say North Street 4 ended up with 70% of the vehicle being exposed to the American property market and only 30% was corporate debt. UBS declined to comment on the allegations.

It is thought HSH intends to mount the legal action in New York, although talks have been going on for several months with UBS in a bid to reach a settlement.

Lawyers expect a “litigation boom” in the wake of the sub-prime fall-out. Sue Miller, a financial litigator at City law firm Stephenson Harwood, said that misrepresentation of claims would almost inevitably include claims against individual traders.

Other legal experts say action against investment banks that sold these products will drag on for years, and up to $500 billion will have to be written off against the value of sub-prime mortgages.

So far the bulk of the pain has been felt on Wall Street, but other financial centres in places like Japan and Korea have yet to admit their losses.