Background

UBS, a Swiss bank, has agreed to pay a total of $1.4 billion in civil penalties due to fraud and misconduct related to its offering of mortgage-backed securities during the global financial crisis. This settlement, announced by federal prosecutors on Monday, addresses a “legacy matter” dating back to 2006-2007.

The Settlement

This settlement marks the final case brought by the Justice Department against major financial institutions regarding misleading statements made to purchasers of mortgage-backed securities. With this settlement, the cumulative recoveries in these cases now amount to $36 billion, according to the Justice Department.

The Mortgage Backed Securities Issue

Leading up to the financial crisis, investment banks packaged, securitized, and sold bundles of mortgages to institutional buyers. These securities were assigned ratings and grades based on quality, with different “tranches” of mortgages designed to mitigate the risk of complete default.

However, the buyers were unaware that the actual quality of these mortgages did not match their assigned ratings. UBS and other banks involved in the settlement were aware that the mortgages underlying the mortgage-backed securities did not meet underwriting standards.

Despite this knowledge, UBS continued to sell these risky securities, resulting in significant financial gains.

Other Settlements

The Justice Department has reached settlements with 18 other financial institutions concerning mortgage-backed security issues. These include Bank of America, Citigroup, General Electric, Goldman Sachs, JPMorgan, and Wells Fargo.

Credit Suisse, a defunct Swiss bank now owned by UBS, also settled with the Justice Department over misconduct related to mortgage-backed security offerings.