Everyone who has ever claimed that the financial industry is overregulated should be forced to read the final notice on UBS’s manipulation of the London interbank offered rate issued Wednesday by the United Kingdom’s Financial Services Authority.
UBS disclosed its cooperation with antitrust authorities more than a year ago, so it’s no surprise that the bank was penalized, though the size of the penalty – a total of $1.5 billion to United States, UK and Swiss regulators – was certainly notable, particularly because UBS had been granted leniency for some parts of the Libor probe. But what’s most striking about the FSA’s filing on UBS, just like its previous notice on Barclays, is the brazenness of the misconduct the report chronicles. According to the FSA, 17 different people at UBS, including four managers, were involved in almost 2,000 requests to manipulate the reporting of interbank borrowing rates for Japanese yen. More than 1,000 of those requests were made to brokers in an attempt to manipulate the rates reported by other banks on the Libor panel. (Libor rates, which are reported for a variety of currencies, average the borrowing rates reported by global banks; 13 banks are on the yen panel.)
The corruption was breathtakingly widespread. According to the FSA, UBS took good care of the brokers who helped the bank in its rate-rigging campaign: Two UBS traders whose positions depended on Libor rates, for instance, engaged in wash trades to gin up “corrupt brokerage payments … as reward for (brokers’) efforts to manipulate the submissions.” In one notorious 2008 phone conversation recounted in the FSA filing, a UBS trader told a brokerage pal, “If you keep (the six-month Libor rate) unchanged today … I will fucking do one humongous deal with you…. Like a 50,000 buck deal, whatever. I need you to keep it as low as possible … if you do that … I’ll pay you, you know, 50,000 dollars, 100,000 dollars … whatever you want … I’m a man of my word.”
According to the FSA, the bank’s rate manipulation, whether to improve UBS’s trading positions or to protect the bank’s image, was so endemic that one flummoxed rate submitter complained in 2007 of being caught between demands by two different traders who wanted two different fake submissions. “I got to say this is majorly frustrating that those guys can give us shit as mu c h as they like…. One guy wants us to do one thing and (the other) wants us to do another,” he told a UBS manager, according to the FSA. Even after The Wall Street Journal first broke news of suspected Libor manipulation in 2008, UBS managers discussed continuing their rate-rigging, this time with the goal of staying in the middle of the pack of rate reports so it would look as though they weren’t engaged in rigging.
UBS and Barclays, moreover, weren’t outliers, according to the FSA. Since Libor rates are averaged, the banks had to collude with other panel banks to affect the reported rates. The FSA filings indicate that they did. The same UBS trader who rewarded brokers with fees for wash trades, for instance, supposedly entered into trades with the specific purpose of aligning his position with those of traders at other panel banks so that they could all share in the benefits of rate-rigging. “UBS’s misconduct,” the FSA said Wednesday, “extended beyond UBS’s own internal submission processes to sustained and repeated attempts to influence the submissions of other banks, acting in collusion with panel banks and brokers at a number of different broker firms.”