The attorney-general of New York declared yesterday that his $18.5 billion (£9.6 billion) settlement with UBS sent a signal to Wall Street that banks are “just going to have to give the money back” concerning America’s most recent bond mis-selling scandal.

Andrew Cuomo secured an agreement with the Swiss bank whereby UBS agreed to spend a total of $22 billion buying back bonds it sold to clients such as the state of New York.

Investors have been unable to sell the bonds, called auction rate securities (ARS), which were supposed to offer immediate access to capital. The market for the bonds has dried up since the credit crisis erupted a year ago.

Mr Cuomo said yesterday: “Hundreds of thousands of people have been caught up in this web. They [the bonds] sound like complicated securities but they were marketed to people who bought them for their retirement accounts. They were not millionaires. The signal we send is that investors have been living in a nightmare locked up in these securities. We will not allow this nightmare to continue. People will get their money back.”

Of that $22 billion sum, the bank said yesterday that it expected to take a $900 million hit from an overall settlement that includes buying back the bonds, offering clients loans against such assets and paying fines to American regulators, who had accused UBS of acting inappropriately and failing to tell investors about the risk that the market could dry up.

UBS has agreed to pay about $18.5 billion buying back the failed auction rate securities to individual and institutional clients in addition to $3.5 billion already agreed, and a $150 million fine to settle an inquiry by American regulators including the state of New York.

Auction rate securities are similar to ordinary bonds except that the interest rate is set periodically at auction. In the event that no bidders take part in the auction – which are held either every week, month or 35 days – the entire market for the bonds freezes up. Regulators have accused banks such as UBS, Merrill Lynch and Citibank of playing down the risk of such a seizure in the market.

UBS said: “Today’s solution provides further relief, beginning in September, to investors who have been understandably frustrated by the industrywide failure of the ARS market. Our leading position in supporting the market and providing liquidity is clear, and now, we are the first firm to give all clients – private, corporate and institutional – the opportunity to be made whole.”

UBS insisted that, despite the settlement, it neither admitted nor denied any wrongdoing. Although the bank is buying back the most ARS assets of any bank so far, it has also written off $37 billion of sub-prime mortgage-backed securities. It has a market value of about $44 billion.

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