UBS Libor Manipulation Merits a Death Penalty

By William D. Cohan, The National Memo

28 December 12

here is no point in mincing words: UBS AG, the Swiss global bank, has been disgracing the banking profession for years and needs to be shut down.

The regulators that allow it to do business in the U.S. - the Federal Reserve, the Securities and Exchange Commission, the Commodity Futures Trading Commission and the Office of Comptroller of the Currency - should see that the line in the sand was crossed last week. On Dec. 19, the bank paid $1.5 billion to global regulators - including $700 million paid to the CFTC, the largest fine in the agency's history - to settle claims that for six years, the company's traders and managers, specifically at its Japanese securities subsidiary, manipulated the London interbank offered rate and other borrowing standards.

Libor is a benchmark index rate, off which trillions of dollars of loans are priced on a daily basis. According to the Wall Street Journal, two of the many victims of the Libor fraud - a scandal that so far has nabbed Barclays plc and UBS but will probably include other large global banks - were the quasi-federal housing agencies Fannie Mae and Freddie Mac, which together claim to have lost more than $3 billion as a result of the manipulation.

The same day of UBS's global settlement, which included the Japanese subsidiary pleading guilty to fraud, two former UBS traders, Tom Hayes and Roger Darin, were sued by the Justice Department and charged with "conspiring to manipulate" Libor.

"The alleged conspirators we've charged - along with others at UBS - manipulated the benchmark interest rate upon which many transactions and consumer financial products are based," Attorney General Eric Holder said in a statement. "They defrauded the company's counterparties of millions of dollars. And they did so primarily to reap increased profits, and secure bigger bonuses, for themselves."

To see the level to which UBS employees descended, one need look no further than their written communications, as per U.S. prosecutors' document dump. "Mate yur getting bloody good at this libor game," one broker told a UBS derivatives trader. "Think of me when yur on yur yacht in monaco wont yu."

But, then again, UBS and bad behavior have become nearly synonymous. During the financial crisis, UBS took writedowns totaling some $50 billion, prompting the company to produce a 76-page, single-spaced, Orwellian transparency report. "In the aftermath of the financial market crisis it was revealed," the report said, "that UBS had taken a serious turn in the wrong direction under the leadership of the senior management then in charge of the bank. The result was an enormous loss of trust."

In February 2009, UBS entered into a deferred-prosecution agreement with the Justice Department and admitted to helping American taxpayers defraud the Internal Revenue Service. UBS agreed to provide the names of some clients whom it had helped to avoid U.S. taxes and to pay a fine of $780 million.

Then, last month, came the conviction of former UBS "rogue" trader, Kweku Adoboli, on charges that he hid trading losses totaling more than $2.3 billion. The U.K.'s Financial Services Authority fined UBS some $47 million and charged that its oversight of London traders was too trusting. The bank seems more than a little out of control.

The latest example of the bank's shameful behavior can be found in the false bravado of the traders who for years manipulated Libor and thought they could get away with it. The gruesome details can be found in the Dec. 19 report from Britain's Financial Services Authority.

It found that unidentified UBS traders entered into "wash trades" - described as "risk-free trades that canceled each other out" and had no commercial rationale - in order to "facilitate corrupt brokerage payments" to three individual brokers at two other firms.

In a Sept. 18, 2008, telephone conversation, Hayes promised that if one broker kept the six-month Japanese yen Libor unchanged for the day, he would in exchange "pay you, you know, 50,000 dollars, 100,000 dollars … whatever you want … I'm a man of my word." Lovely.

We also find out that a year earlier, Hayes had a chat on his Bloomberg terminal with Darin in which he pushed to find out what rate for Japanese yen Libor UBS would submit to the governing body that set the rates. "Too early to say yet," Darin replied, before estimating that 0.69 percent "would be our unbiased contribution."

Hayes repeated his request for a "low" submission on the three-month Japanese yen Libor. Darin messaged back: "as i said before - i dun mind helping on your fixings, but i'm not setting libor 7 [basis points] away from the truth i'll get ubs banned if i do that, no interest in that." Darin eventually submitted a Libor rate two basis points less than the "unbiased" figure of 0.69 percent.

In levying the record $700 million fine, David Meister, the CFTC's director of enforcement, said that "when a major bank brazenly games some of the world's most important financial benchmarks, the CFTC will respond with the full force of its authority." That's good as far as it goes, and the CFTC is to be commended for rooting out the global Libor manipulation scandal.

But an even more emphatic message needs to be sent to UBS by its prudential regulator in the U.S.: You are finished in this country. We are padlocking your Stamford, Connecticut, and Manhattan offices. You need to pack up and leave. Now.