Swiss bank UBS accepted a $1.5 billion fine on Wednesday after admitting fraud and bribery in a deepening scandal over the rigging of global benchmark interest rates. Dozens of UBS staff manipulated the Libor rate, which is used to price trillions of dollars worth of loans, across three continents in collusion with brokers and traders at other banks, according to an international investigation.
The controversy is expected to ensnare other big lenders and spark civil lawsuits as well as possible criminal proceedings against individuals involved. The penalty UBS agreed with US, UK and Swiss authorities far exceeds the $450 million levied on Britain''s Barclays in June, also for rigging Libor, and is the second largest ever imposed on a bank. "We deeply regret this inappropriate and unethical behaviour. No amount of profit is more important than the reputation of this firm," said UBS CEO Sergio Ermotti.
The Libor benchmarks are used for trillions of dollars worth of loans around the world, ranging from home loans to credit cards to complex derivatives. Tiny shifts in the rate, compiled from daily polls of bankers, could benefit banks by millions of dollars. But every dollar a bank benefited meant an equal loss by a bank, hedge fund or other investor on the other side of the trade - raising the threat of a raft of civil lawsuits. "The big unknown factor is the civil litigation that could follow on as a result of this," said Paras Anand, European equities head at Fidelity World-wide Investment, one of UBS''s biggest investors. "The issue for shareholders is the challenge of pricing that risk in."
UBS''s unit in Japan pleaded guilty to one count of fraud relating to manipulation of benchmark rates, including the yen Libor. The probe highlighted the important role played by one UBS banker, identified as Trader A, who "embarked on a co-ordinated campaign" to influence the yen Libor rate. Britain''s Financial Services Authority (FSA) said UBS staff made "corrupt" payments to reward brokers for helping to manipulate rates, expanding the scandal to include bribery. Separately on Wednesday, an Italian court found UBS guilty of aggravated fraud for misselling derivatives to the city of Milan. Deutsche Bank, J.P. Morgan and Depfa Bank were also found guilty.
The UBS fine comes a week after Britain''s HSBC agreed to pay a record $1.92 billion to settle a probe in the United States into laundering money for drug cartels. UBS shares were flat at 1540 GMT after earlier hitting a 17-month high of 15.5 francs ($16.97). "You can see from the stock movement that the fine is already baked in," said Markus Jordi, principal at Zurich-based investment manager Cosmos Capital.
The Libor settlement caps a torrid 18 months for UBS during which it lost $2.3 billion in a rogue trading scandal, underwent a management upheaval and made thousands of job cuts. "We have to acknowledge that the behaviour of certain of our employees who were disciplined during this investigation ... is and was unacceptable," Ermotti told reporters, adding that around 40 people had left UBS or had been asked to leave.