UBS has agreed to buy back a total of $18.6 billion of auction-rate securities it had sold to investors as well as pay a total fine of $150 million to US state and federal authorities for selling securities that were marketed as safe alternatives to cash but which collapsed in value. 

In an agreement with the New York Attorney General, the Massachusetts Securities Division, the Securities and Exchange Commission and other state regulatory agencies, the Zurich-listed bank said it would repurchase $8.3 billion of ARS at par value from most private clients during a two-year time period beginning 1January, 2009. Additionally, UBS said it will also, from June 2010, repurchase all or any of the remaining securities, worth $10.3 billion, at par, from its institutional clients.

The announcement was in addition to the firm’s recently announced intention to repurchase $3.5 billion of tax-exempt Auction Preferred Stock.

A number of large banking groups, including Citi, Merrill Lynch and Credit Suisse, have become embroiled in the saga of auction-rate securities, which are bonds or preferred shares whose interest rates are reset by period bidding run by dealers.

Some banks allegedly abandoned their routine role as buyers of last resort for the debt in mid-February as demand dried up, allowing the market to collapse and leaving investors stuck with what had been pitched to them as money-market-like instruments.

In the case of UBS, the debt sale scandal comes on top of the problems it has faced in the wake of $38 billion of write-downs connected to the global credit crunch.