By Joseph A. Giannone
NEW YORK, June 5 (Reuters) - UBS AG , which tried to find a buyer for its U.S. municipal bond unit, said it is shutting the business down as it scrambles to rebuild an investment bank that lost $37 billion in the credit crunch.
"After a careful review of the options over the past few weeks, we have today announced our decision to close the business with immediate effect," UBS Investment Bank CEO Jerker Johansson said in an internal memo distributed Thursday and obtained by Reuters.
Roughly 70 people out of the unit's more than 300 employees will be transferred from UBS's investment bank to its U.S. wealth management division, a person familiar with the situation said. The rest will be laid off. The business will be wound down over the next few months, the memo said.
The move by UBS will again thin the ranks of Wall Street public finance bankers after Bear, Stearns & Co. was taken over by JPMorgan Chase & Co at the end of May. That merger resulted in nearly 8,000 layoffs at Bear, including muni bankers.
As a result of reduced competition in the municipal market, cities, states, schools and other issuers could face higher borrowing costs, according to market participants.
Meanwhile, smaller or regional muni firms might benefit from the exodus of larger banks.
"Firms that have their feet solidly on the ground and have a core business plan and haven't suffered the travails that other firms have are able to take advantage of these situations," said Bruce Young, vice chairman of Chicago-based Mesirow Financial.
He added that regional firms will be "very interested" in some of the people who lost their jobs as Wall Street muni units are shuttered.
Tom Dresslar, spokesman for California Treasurer Bill Lockyer, said regional firms have been "much more helpful" to the state during the recent market turmoil than some of the larger firms.
"We will factor that into our decisions when we put together underwriting teams for future bond deals, with the goal of doing more business with regional firms," Dresslar said.
UBS issued a statement confirming the news, although without some of the details that were in the internal memo.
Last month, UBS said it would sell or shut its muni business as it overhauls an investment bank that generated crippling losses on mortgages and other debt. New management, eager to revive profit and conserve capital, has said they want to focus on businesses serving "core clients."
UBS ranked fifth among senior underwriters of municipal bonds in the first quarter of 2008, with 89 deals totaling $7.46 billion, according to Thomson Reuters data. That is down from 2007, when UBS was the No. 4 underwriter with 614 deals totaling $36.3 billion.
The muni business was not an important source of earnings, yet the move marks a retreat by a Swiss bank that wanted to be a top trading and investment banking force in the United States. UBS became a leading underwriter of muni debt and a top U.S. retail broker after it acquired PaineWebber in 2000, the first of a series of acquisitions.
UBS said it will continue to sell muni bonds to clients and trade these securities through its wealth management unit.
In related moves, the memo said auction-rate securities processing responsibilities will transfer to UBS wealth management. UBS also intends to sell its variable-rate demand obligation business to another qualified dealer.
Johansson, a Morgan Stanley executive recruited in February to turn UBS's capital markets businesses around, also said the investment bank will establish a student loan structuring group and continue to advise on infrastructure privatization deals.
Meanwhile, worries about Lehman Brothers and its credit strength have crept into the muni market.
Paula Gold-Williams, chief financial officer of San Antonio's CPS Energy, said a discussion was held with Lehman ahead of its underwriting of the Texas issuer's $289 million electric and gas system revenue bonds on Thursday.
"Lehman gave us assurances they will be able to handle being lead underwriter in the deal," Gold-Williams said, adding that "we felt comfortable" about keeping the firm in the deal.
Lehman has been besieged by reports that it may need to raise capital, but its shares rose on Thursday after Deutsche Bank maintained a "buy" recommendation on the investment bank and a Loomis Sayles bond manager on Wednesday said he was buying Lehman debt. (With additional reporting by Karen Pierog in Chicago and Jim Christie in San Francisco; editing by Maureen Bavdek)
