Feb. 14 (Bloomberg) -- UBS AG won't buy auction-rate securities that fail to attract enough bidders, joining a growing number of dealers stepping back from the $300 billion market, said a person with direct knowledge of the situation.

The second-biggest underwriter of the securities, whose rates are reset periodically at auctions, notified its 8,200 U.S. brokers of the decision yesterday, said the person, who declined to be identified because the announcement wasn't publicly disclosed. Goldman Sachs Group Inc., Lehman Brothers Holdings Inc. and Citigroup Inc. allowed auctions to fail as mounting losses from the collapse of subprime mortgages causes capital markets to seize up.

As much as $20 billion of auctions didn't attract enough buyers yesterday, an 80 percent failure rate, based on estimates from Bank of America Corp. and JPMorgan Chase & Co.

``We are kind of in uncharted territory right now,'' said Anne Kritzmire, a managing director for closed-end funds at Nuveen Investments in Chicago.

Auctions are failing as confidence in the creditworthiness of insurers backing the securities wanes, and as loss-plagued banks seek to avoid tying up their capital. More than 129 auctions failed yesterday, Kritzmire said.

Rohini Pragasam, a spokeswoman for UBS, the second-biggest underwriter of municipal auction-rate debt after Citigroup in 2006 according to Thomson Financial, declined to comment. UBS, the dealer on the hospital corporation's auction, today posted the biggest-ever loss by a bank for the fourth quarter. The stock declined $3.05, or 8.25 percent, to $33.94 at 11:47 a.m. in New York.

Auction-Rate Resets

Auction bonds have interest rates determined by bidding that typically occurs every seven, 28 or 35 days. When there aren't enough buyers, the auction fails and bondholders who wanted to sell are left holding the securities. Rates at failed auctions are set at a level spelled out in official statements issued at the initial bond sale.

Investors have little opportunity to judge the risk that auctions will fail because of little public disclosure about interest rates set at the periodic bidding or other details such as how many bids were submitted or how many bonds were offered for sale.

The Municipal Securities Rulemaking board is working on changes to its trade reporting system that would reveal at least the interest rate on auction bonds when they are traded. Currently, only the price is disclosed.

Greater `Transparency' Sought

``I think you need to have more transparency in terms of the market so that investors can judge liquidity risks and so that people, both retail investors and corporate investors, can decide where they want to put their money,'' Joseph Fichera, chief executive officer of Saber Partners, a New York based financial adviser to local governments, said in an interview on Bloomberg Television.

Until recently, UBS and other banks that collect fees for running auctions have stepped in with their capital to prevent failures when bidding faltered. These firms have grown unwilling to commit their money to auction-rate securities after suffering at least $133 billion in credit losses and mortgage writedowns stemming from the subprime mortgage collapse.

Unwilling to Bid

``If you talk to the dealers, their balance sheets are getting flooded with these auction-rate certificates right now,'' said Doug Dachille, who oversees $7 billion in fixed- income securities as chief executive officer of First Principles Capital Management LLC in New York. ``Right now, the way they're dealing with the issue is they won't bid. That's why we're seeing failed auctions.''

Auctions began stumbling three weeks ago when banks couldn't drum up enough demand for auction rate bonds sold by borrowers, including Georgetown University and Nevada Power. Since then, auctions have failed for frequent and well-known borrowers, such as Port Authority of New York and New Jersey and New York state's Metropolitan Transportation Authority.

``We're hearing it's a general reaction to the auction market,'' said Marlene Zurack, senior vice president for New York City's Health and Hospitals Corp., whose auction yesterday of $64.9 million of bonds failed. ``The truth is our credit is good, our ratings are good, our bond insurer is unscathed, and it still happened.''

Massachusetts has sold $565 million in auction-rate securities, including two series of bonds sold in 2000, according to state treasury spokeswoman Alison Mitchell. An auction to reset rates on one of those series failed yesterday, and the rate reset to 4.473 percent from 3 percent, she said.

Insurance at Issue

Eighty percent of the $15 billion to $25 billion of auction-rate bonds scheduled for bidding daily didn't attract sufficient bids yesterday, according to Alex Roever, a JPMorgan Chase & Co. fixed income analyst.

The failures show the widening impact of the bursting of the U.S. housing bubble, which has caused rising defaults on home loans and threatened the credit ratings of the insurance companies that guaranteed structured securities -- such as collateralized debt obligations tied to mortgages -- against default.

The waning strength of some bond insurers has caused investors to trim holdings of debt backed by companies such as Ambac Financial Group Inc.'s Ambac Assurance Corp., concerned that it may be difficult to sell such debt should insurers' problems worsen. That has hurt borrowers such as the Port Authority, whose auction debt soared to 20 percent on Feb. 12 from 4.3 percent a week ago even though there is little risk of default.

Local governments are obliged to pay the high rates until either the auctions start attracting more buyers or they modify the bonds to some other kind of variable-rate debt or a fixed interest rate. Bankers and borrowers have been working on conversion plans for several weeks.

To contact the reporter on this story: Martin Z. Braun in New York at mbraun6@bloomberg.net; William Selway in San Francisco at wselway@bloomberg.net.

Last Updated: February 14, 2008 11:49 EST