The Corporate World - Thursday, December 27, 2012 9:26 - 0 Comments

UBS Pays $1.5 Billion To Settle Rate Rigging Case

UBS, the Swiss banking giant, entered into a record settlement with global authorities last month, agreeing to a combined $1.5 billion in fines for its role in a multi-year scheme to manipulate interest rates. Officials are increasingly taking a hard line against financial wrongdoing, which is a good thing. The Justice Department also got a guilty plea from the bank’s Japanese subsidiary. This should send a warning shot to other big banks suspected of rate rigging. The UBS subsidiary, which agreed to plead guilty to a single count of wire fraud, is the first unit of a big bank to agree to criminal charges in more than a decade.

The cash penalties represent the largest fines to date related to the rate-rigging inquiry. The fine is also one of the biggest sanctions that American and British authorities have ever levied against a financial institution, falling just short of the $1.9 billion payout that HSBC made a week earlier over money laundering accusations. The severity of the UBS penalties, according to the authorities, reflected the extent of the problems. The government complaints exposed a scheme that spanned from 2005 to 2010, describing how the bank reported false rates to squeeze out extra profits and deflect concerns about its health during the financial crisis. Tracey McDermott, the enforcement director for the Financial Services Authority of Britain, said in a statement:

The findings we have set out in our notice today do not make for pretty reading. The integrity of benchmarks, are of fundamental importance to both U.K. and international financial markets. UBS traders and managers ignored this.

The UBS case reflects a pattern of abuse that authorities have uncovered as part of a multi-year investigation into rate rigging. The inquiry, which has ensnared more than a dozen big banks, is focused on key benchmarks like the London interbank offered rate, or Libor. Such rates are used to help determine the borrowing rates for trillions of dollars of financial products like corporate loans, mortgages and credit cards.

It was reported that in the UBS matter, the wrongdoing occurred largely within the Japanese unit, where traders colluded with other banks and brokerage firms to tinker with Yen denominated Libor and bolster their returns. During the 2008 financial crisis, the authorities said UBS managers also “inappropriately gave guidance to those employees charged with submitting interest rates, the purpose being to positively influence the perception of UBS’s creditworthiness.” A series of interesting e-mails and phone calls were discussed in which traders tried to influence the rate-setting process. For example, one UBS trader said to an employee at another brokerage firm in September 2008:

I need you to keep it as low as possible. If you do that the trader promised to pay whatever you want. I’m a man of my word.

As the employees carried out the alleged manipulation, according to the Financial Services Authority, they also celebrated the efforts, with one trader referring to a partner in the scheme as “superman.” “Be a hero today,” he urged, according the complaint by regulators.

The UBS case provides a look at broader problems in the rate-setting process, which affects how consumers and companies borrow money around the world. In June, authorities reached their first Libor settlement, securing a $450 million payout from Barclays, the big British bank. The UBS case — the product of cross-border collaboration among regulators and federal prosecutors – is more than triple the earlier fine.

The Commodity Futures Trading Commission and the Justice Department leveled about $1.2 billion in combined fines. The Financial Services Authority of Britain fined the bank $260 million. The Swiss Financial Market Supervisory Authority, which does not have the power to fine, recovered $65 million of the bank’s ill-gotten gains. The Justice Department’s criminal division, which arranged the guilty plea with the Japanese subsidiary, also struck a non-prosecution agreement with the parent company. The exact total of the penalties was uncertain at press time because the Department hadn’t released its settlement documents. I suspect there are some top executives with other banks who may be sort of concerned over what has been happening. Some American institutions, including Citigroup and JPMorgan Chase, according to reports, may still be in regulators’ crosshairs. The UBS case has exposed the systemic problems with the rate-setting process. Over a six-year period, UBS traders targeted the major currencies that form the Libor system, including the U.S. dollar denominated rate. The bank in this settlement was also cited for attempting to manipulate other benchmarks like the Euro Interbank Offered Rate, or Euribor, and the Tokyo Interbank Offered Rate, or Tibor.

Source: New York Times