Playing poker involves a certain amount of strategy. Sure, you want to hold a royal flush, but if you can trick the other players into thinking that’s what you have, two pair can do you just as much good as the real thing. You also need to be careful about how long you stay in the game. You might be in trouble if you stick around holding nothing, but fold too soon, and you might find that your three of a kind would have won the pot. The same rule applies to investments. You need to know how long to stay in the game, when to wait out the market, and when to fold. Sometimes, you find that if you fold too soon, you miss out on substantial benefits while the other players profit.
This is similar to what happened with UBS when the Auction Rate Securities market collapsed in 2008. Many investors sold their accounts, absorbing a substantial loss, rather than lose the entirety of their investments. Auction Rate Securities are essentially bonds with long-term maturity and changing interest rates. They were marketed to investors as being just as dependable as cash, but with the added bonus of a substantial long-term interest profit.
Before the market collapsed, the investors who sold their accounts at a loss had no way of knowing that, had they stayed until their accounts were value-less, they would have benefited. Though they were trying to make a wise financial decision, they later found that other investors received full compensation after the ARS market collapsed. UBS agreed to repurchase their investors’ accounts at par after ARS auctions failed in February 2008.
While this offer was intended to help clients who had, through no fault of their own, lost the money they had been assured was secure, it only applied to current account holders. Those who had acted prior to the market failure by selling their securities were not included in the deal offered by UBS. Despite the fact that they had been given the same promises upon investment and had lost as much money as the other clients, those who had sold at a great loss were not covered by the terms of the agreement with UBS.
While the company has, so far, been granting claims brought by previous investors and refunding their losses, their good faith, like their capital, is not infinite. On August 8, 2008, following a class action lawsuit brought by investors, UBS agreed to purchase or provide liquidity for $22.1 billion of Auction Rate Securities. However, once this quota is exhausted, UBS is no longer legally bound to pay back investors or previous investors who bring claims for their money, nor will they be able to do so. Although UBS has thus far acted responsibly and reasonably to compensate its clients, the outpouring of financial justice cannot and will not last forever. Under the settlement agreement, UBS will purchase ARS at par until January 1, 2011 in the amount of $8.3 billion. This liquidation applies to private investments under $1 million. An additional $3.5 billion of tax-exempt investments will be covered by the same date. In June 2010, UBS will use the remaining $10.3 billion to purchase additional securities. Once this money is exhausted, ARS can no longer be rebought by UBS.
The lesson to be learned from this is the same as any you would learn at the poker table: timing is everything. If you are holding Auction Rate Securities or are eligible for reimbursement, you must act before time expires. Do not waste time; file your claim as soon as possible. Otherwise, you will be forced to fold and miss out on your share of the pot.