Call me naive, but after the Barclays revelations, I actually thought that I couldn’t be shocked about the extent of Libor manipulation. Boy, was I wrong. I could quote all 40 pages of the FSA notice fining UBS for Libor fraud: this is far, far worse than simply understating UBS’s borrowing costs so as to make investors think the bank was healthy. In fact, a lot of the fraud was designed to move Libor up rather than down: whatever the traders could make the most money manipulating.
The FSA concludes, quite explicitly:
UBS’s misconduct is, although similar in nature, considerably more serious than Barclays’ because it was more widespread within the firm, being exacerbated by the control failings, in particular the inherent conflict of interest in its submission function. More individuals, including Managers and Senior Managers, participated in or knew about the manipulation and there were more instances of individual manipulation, across more currencies. Furthermore, the extent to which UBS colluded with others was significantly greater and involved financial rewards being paid to Broker Firms.
The latter point is key: UBS didn’t just manipulate its own submissions, but actively attempted to manipulate other firms’ submissions as well. And at points the bribery was so explicit as to beggar belief that anybody would ever communicate such things on the record:
If you keep 6s [i.e. the six month JPY 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.
A “50,000 buck deal” here does not mean a $50,000 deal: it means a $50 billion deal. If the broker on such a deal siphons off a fee of 0.0001%, that’s $50,000 right there.
The $1.5 billion that UBS is paying in fines here is enormous, but it’s not remotely enough: if the chairman and CEO of Barclays were forced to resign over much lesser Libor fraud, then we’re going to need to see heads roll at UBS too. And, with any luck, some individual criminal prosecutions of UBS executives, to boot.
That said, UBS has already taken the most drastic action it could: it has basically shut down its entire fixed-income business. That unit made enormous profits when things were going well — but it was staffed by rogue traders, who manipulated Libor rates around the world as a matter of course, and who on top of that contrived to lose mind-boggling amounts of money during the financial crisis.
Other fines, for other banks, are sure to follow this one — but if Barclays was dreadful and UBS was much worse than Barclays, it’s hard to imagine that anybody has clean hands here. You want to know why pretty much the entire financial sector is still trading at less than book value? This is why: the number of investors who trust the banks is now zero, and banking seems to have become a game of picking up fraudulent nickels in front of a relentless justice-department steamroller. (And for good measure there are all the civil suits as well: the $1.5 billion that UBS is paying today is just a down-payment on the all-in cost of its Libor fraud.)
The fixed-income department at UBS was the merged product of many storied firms: Swiss Bank, SG Warburg, Dillon Read, Paine Webber, Kidder Peabody, Phillips & Drew, and many others. And that’s the most depressing part of this whole story: there were good and honest managers at all those shops, and they all got pushed out by the fast-buck merchants. The inevitable conclusion: if you’re a senior fixed-income executive in the investment banking world, you’re necessarily suspect. Because this isn’t the kind of world where honest men live long.