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Libor Scandal Just Took A Nasty Turn, Collusion Findings Should Make Banks Very Nervous

This article is more than 10 years old.

The worst case scenario around findings in the global Libor investigation may become a reality for banks.

Today UBS became the second bank to settle Libor manipulation charges agreeing to pay $1.5 billion to US, UK and Swiss authorities. The Swiss bank's monetary punishment blows out of the water the $450 million Barclays settlement from July.

The UBS settlement is one that other banks under investigation are going to be looking at very closely. If the Barclays settlement rattled Libor-submitting firms then the UBS case has got them shaking in their shiny loafers.

Why? Simply put: Collusion. The charges made against UBS show the bank not only manipulated the Libor rate to make itself look healthier to outsiders but also, and perhaps more often, to make money by apparently colluding with other banks. From a regulator's perspective that's a lot worse than lying a bit to appear in better condition.

Here's some background. Libor, if you need a refresher, stands for the London Interbank Offered Rate. It’s the rate at which banks are able to borrow money from each other. The lower a bank's rate (banks submit their own rates) the healthier it's deemed to be and vice versa. The rates were especially indicative of banks' health during the peak of the financial crisis when the markets were all but frozen and access to funds were limited.

An agency takes those submissions from the banks, lobs off the top 25% and bottom 25% and publishes the average of the remaining rates. That’s how the Libor rate--a rate tied to hundreds of trillions of dollars worth of financial contracts and derivatives. Manipulated rates seriously hurt the integrity of the system.

In the Barclays case, much of the manipulation appeared to occur by traders hoping to make the bank look healthier during the crisis and less so for profit--though profits were certainly a big motivator.

For UBS, the game was much more about lining its pockets than anything else. The CFTC says it found more than 2,000 instances of unlawful conduct involving dozens of UBS employees and that it colluded with other panel banks.

The CFTC says UBS colluded with at least four other panel banks to make false submissions, and induced at least five interdealer brokers to disseminate false information or otherwise influence other panel banks’ submissions.

One of the most glaring incidents involves a UBS trader with a large Yen derivatives book who also happened to be the most successful for UBS. He generated approximately $40 million in profits for UBS in 2007, $80 million in 2008, and $116 million during the first 9 months of 2009 until he left UBS in September 2009, according to the DoJ.

The DoJ says he bribed fellow employees to help him manipulate the Libor rate, according to details released by the Department of Justice. By enlisting the help of UBS cash brokers the Yen trader was able to spread false market information. (LIBOR submitters often collect information from cash brokers regarding the availability and price of cash in the money markets and elsewhere.)

In other words, the trader asked cash brokers to provide false market information to Libor submitters at other banks that would cause them to submit rates one way or another.

The DoJ says the trader's manager "was well-aware of this manipulative tactic and later estimated that during one six-month period in 2007, this scheme was used on a daily basis and had a 50% to 60% success rate."

In one instance the trader asks the cash broker if he knows the guy who covers yen on the cash desk. The broker does and the UBS trader then replies with this:

Trader-1: right from now on i need you to ask him a favour on the fixes . . . i will make sure it comes back to you . . . i alrteady do it with [Brokerage-A] . . . basically can you ask him to broke 3m cash ie libor lower for me today . . . i will look after you off the back of it. . . i do that for [Brokerage-B] too . . . so emphasise the importance to you . . . just suggest it looks a little softer to his accounts
Broker C: ok mate i understand i will go and speak to him
Trader-1: stuff like that . . . thanks mate . . . is very important to me today

After a five minute break, the two resumed their electronic chat:

Broker-C: just spoke to them and they are on the case
Trader-1: ok mate much appreciated

Here's another conversation between the same UBS trader and the cash broker of another Libor-submitting firm:

CONTINUED HERE

Trader-1: LOW 1m . . . LOW 3m . . . HIGH 6m . . . 6m is important today mate . . . pls spoof bids
Broker-B: rite ok mate ill make a special effort

Later in the same chat, Broker-B remarked to Trader-1:

mate yur getting bloody good at this libor game . . . think of me when yur on yur yacht in monaco wont yu

When the Libor-rigging scandal broke this summer it appeared that the damage banks would face would depend on the their reasons for manipulating the rate and the method used for manipulation. The UBS settlement shows the Libor manipulation was on the extreme end of that spectrum.

Marti G. Subrahmanyam, a finance professor at NYU’s Stern School of Business, says there are several levels in the Libor manipulation game for banks:

  1. Make your bank look more creditworthy
  2. Make your desk look more profitable
  3. Collude with others to achieve #2  more effectively

"These are obviously in order of seriousness of the violation.  It appears that level 3 has been the modus operandi for some of the players, such as UBS allegedly," he adds.

If more banks are implicated for this kind of collusion then, at the very least, expect more $1 billion-plus settlements. Collusion, after all, isn't an act that can be committed alone.

Under the Sherman Antitrust Act price-fixing conspiracies are illegal and punishable by up to 10 years in prison. Earlier this year a Nomura analyst said if of the 16 bank defendants half were found guilty and the damages were trebled under the Sherman Act then each bank could bear losses to the tune of $2.3 billion. (The DoJ has charged former UBS traders Tom Hayes and Roger Darin with antitrust violations under the Sherman Antitrust Act.)

The documents released by authorities do not reveal the names of the other banks mentioned by UBS traders but the CFTC says at least four other banks colluded with the Swiss bank. Over the next few months more settlements will be announced with banks in both the US and Europe at the center. Just which level of the manipulation game they were playing will be illustrated by the sum of their settlements and the extent of charges filed against individuals.

Boston University School of Law Professor and former counsel to the Fed Board of Governors, Cornelius Hurley, says, "To date the Libor focus has been mostly on banks rigging Libor to enhance their brand and health. This seems much more about lining pockets and common theft."