Case | HBS Case Collection | March 2009 (Revised September 2011)

UBS and Auction Rate Securities (A)

by Daniel Baird Bergstresser, Shawn A. Cole and Siddharth Bhaskar Shenai

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.

Keywords: Cost vs Benefits; Financial Crisis; Asset Pricing; Financial Liquidity; Financial Instruments; Government Legislation; Risk and Uncertainty; Financial Services Industry;

Citation:

Bergstresser, Daniel Baird, Shawn A. Cole, and Siddharth Bhaskar Shenai. "UBS and Auction Rate Securities (A)." Harvard Business School Case 209-119, March 2009. (Revised September 2011.)