UBS fined for Libor rigging, traders charged

The UBS trading floor in Opfikon, Zurich Keystone

UBS has agreed to pay around SFr1.4 billion ($1.53 billion) in fines to United States, British and Swiss authorities to resolve Libor-related investigations. Two former traders were also the first to be criminally accused in the global scandal.

On a black day for Switzerland’s biggest bank, UBS announced on Wednesday its branch in Japan had entered a plea to one count of wire fraud relating to the manipulation of benchmark interest rates, including the Yen Libor. The Libor interest rate, short for London interbank offered rate, is used to price financial contracts around the globe.

US prosecutors later charged two former UBS traders with conspiracy, according to a criminal complaint unsealed in a district court in New York on Wednesday. One of the traders was also charged with wire fraud and an antitrust violation.

On Thursday, the Hong Kong Monetary Authority said it would investigate UBS over possible misconduct related to the Asian financial center’s benchmark interest rate.

Making a statement about the Libor settlement, the Swiss bank said $1.2 billion would go to the US Department of Justice and Commodity Futures Trading Commission (CFTC), with a further £160 million (SFr237 million) to Britain’s Financial Services Authority (FSA) and SFr59 million ($65 million) to the Swiss Financial Market Supervisory Authority (Finma).

UBS cautioned that the US payment was subject to the CFTC’s approval.

“During the course of these investigations, we discovered behaviour of certain employees that is unacceptable. We have cooperated fully with the authorities and taken decisive and appropriate actions to correct the issues and to strengthen our control processes and procedures,” said UBS CEO Sergio Ermotti on the UBS website.

In the findings into its investigation, Finma said on Wednesday that the traders involved in the rate rigging scandal “were mainly acting in their own interest”.

“At different stages during the years 2007 and 2008, UBS managers inappropriately gave guidance to those employees charged with submitting interest rates, the purpose being to positively influence the perception of UBS’s creditworthiness,” Finma added.

The Swiss regulatory body said “numerous employees and a limited number of managers were involved in the misconduct.” Around 40 people reportedly left UBS or were asked to leave the bank as a result of the investigation.

Finma took the heat off of its own banks division head, Mark Branson, who held a senior position at UBS in Japan in 2006 and 2007.

“Finma did not find any indication of the then top management at UBS being aware of the traders’ misconduct or interference with interest rates for reputational reasons.”

Branson was kept in “strict recusal for the entire duration of the [investigation]”.

Latest blow

The charge is the latest blow for UBS, which already suffered a $2.3-billion loss in a rogue trading scandal earlier this year. In 2009, it paid a $780 million fine to settle a US tax investigation after nearly collapsing a year earlier under the weight of sub-prime losses.

Over the past few years, scandals not only caused financial losses but also major upheavals involving thousands of job cuts at the bank. UBS is now winding down some of the riskier investment businesses that tarnished its name.

UBS is not the only bank to make headlines over the past months for the wrong reasons.

In Britain, Barclays settled a £290 million (SFr432 million) rate fixing case, while HSBC paid up for money laundering and Standard Chartered for violating sanctions. In Germany, Deutsche Bank was raided in connection with a tax scam involving carbon permit trading.

UBS woes

UBS’s recent troubles started with the subprime mortgage crisis: it had to write down some $50 billion between the end of 2007 and 2009.
 
In 2008 it made an annual loss of SFr21 billion, the biggest in its history. In the same year the Swiss National Bank was forced to bail out UBS with a SFr6 billion loan and by taking over bad debt.
 
It was the first Swiss bank to be investigated by US prosecutors for helping US citizens avoid paying tax: in 2009 it was forced to pay a $780 million fine.
 
The Swiss government subsequently agreed to hand over the names of 4,500 American UBS clients, a serious blow to Swiss banking secrecy.
 
In 2011 London trader Kweku Adoboli  lost UBS SFr1.8 billion in “unauthorised” trading. In November 2012 Adoboli was jailed for seven years for the fraud.  Britain’s financial regulator fined the bank £30 million pounds.
 
In the wake of the scandal, chief executive Oswald Grübel, who had been appointed in 2009 to turn the bank around, stepped down. He was replaced by Sergio Ermotti.

In October 2012 Ermotti said he would cut 10,000 jobs and wind down the fixed-income business, as part of a far-reaching overhaul to return UBS to its private banking roots.

Soothing the waters

Lenders are keen to settle charges so they focus on rebuilding their business and winning back customers’ trust. Credibility among clients and shareholders suffered during the financial crisis, when taxpayers ended up bailing out banks that had gambled themselves into trouble.

 

Risk is also a feature of the recent Libor scandal.

Banks report on a daily basis the benchmark rate, which is based on the average of credit conditions the larger banks are offered by other institutes. The rate determines the price of more than $300 trillion worth of loans including mortgages, credit cards, business and students’ loans as well as derivatives such as options and more complex instruments.

Traders of these Libor-linked financial products may have illicitly raked in profits when the banks’ staff nudged the reference rate, even if only by a fraction of a percentage point.

The scandal prompted a political and public backlash against the finance sector. Recent settlements may further fuel public outrage at banks’ ineffective control mechanisms and questionable standards.

To make things worse, borrowers might have also suffered direct damage because they could have ended up paying more interest than was due.

‘Malicious’ actions

Even as the UBS investigation comes to a close, authorities across the world are still fast-tracking several civil and criminal cases against more than a dozen banks for alleged rate rigging. UBS is for example facing civil claims for damages by plaintiffs including broker Charles Schwab and the city of Baltimore in the US.

Unlike British bank Barclays, where the fines prompted executives to quit, the settlement is not expected to make massive waves as UBS already culled its management following previous scandals.

UBS blew the whistle on its own involvement in the Libor scandal in 2010. Credit Suisse has also said it is cooperating with several investigations, but the country’s second-largest bank has a less prominent role on Libor panels than UBS. Swiss banks have also not managed to calm the situation back home either.

Irrespective of the Libor settlements, the Swiss Competition Commission will also examine whether UBS violated domestic antitrust legislation. This would be the case if any Swiss investors suffered due to the bank’s actions.

In its 2011 annual report, UBS revealed that it had negotiated conditional immunity or leniency from the US Department of Justice and the competition commission. Today’s fines show that regulators are not particularly lenient, but rather want to set an example showing that even large banks are not immune.

The fallout from the Libor case could be significant for the big banks involved according to experts. If found guilty, the financial institutions could face multi-million dollar fines and potential civil lawsuits for poor standards, immoral behaviour and malpractice over the next few years. And, today’s settlement may also provide regulators in other countries with more ammunition to start their own investigations.