[ by Howard Haykin ]

Libor manipulation, as far as I can recall, popped into the public consciousness one day and, shortly thereafter, we learn that a dozen nations reportedly have deployed teams of regulators to investigate "who, what, where, when and how."  As the regulators began their investigations, the media followed in lock-step, attempting to report their every move.  That meant the public would be fed a daily diet of official press releases, leaked disclosures from supposedly reliable sources, and detailed speculation.  

London appeared to be the hub of the controversy - that's where the London Interbank Offered Rate, or Libor, is compiled using rates provided by traders at London Financial institutions.  Other benchmarks like the Euro Interbank Offered Ratem and the Tokyo Interbank Offered Rate, or Tibor, were spinoffs of the original benchmark rate.  However, I was still unsure which institutions participated in the compilation process and where the mechanics were carried out.  I continued to hold out hope that everything was conducted in London, England under the watchful eye of the Bank of England. 

By summertime, Barclays elected to come forward and be the first bank to enter into settlement with the regulators over the bank's alleged roles in the manipulation scheme.  Now, I still wasn't clear as to how the CFTC and the U.K.'s FSA had the good fortune to be the winning regulators.  Presumably they were in the right pace at the right time.  The settlement, as reported by the media, appeared to further substantiate the premise that London was the hub of the Libor universe where rates were compiled and any manipulation was carried out.   

Apart from the Barclays deal, no other bank stepped forward to make a deal.  In fact, government investigators and reporters alike waffled about whether a single bank could manipulate the benchmark rate on its own, without assistance from collaborating firms.  The mixed signals appeared to indicate the complexity of the Libor system, or its simplicity that might allow a firm to act on its own.

The past week, the world anticipated that UBS would reach a deal to settle with whichever regulators were on top.  In any case, it was widely anticipated that the regulators would accuse the bank's traders in London of participating in a scheme - with or without others - to manipulate the Libor benchmark.  Yet, that would not be the case.

Manipulation Takes Place Principally in Japan.   According to NYTimes Dealbook, in the UBS matter, the wrongdoing occurred largely within the Japanese unit, where traders colluded with other banks and brokerage firms to tinker with Yen denominated Libor and bolster their returns.

In a series of colorful e-mails and phone calls, traders tried to influence the rate-setting process. “I need you to keep it as low as possible,” one UBS trader said to an employee at another brokerage firm in September 2008, according to the complaint filed by the Financial Services Authority. “If you do that,” the trader promised to pay “whatever you want. I’m a man of my word.”

As the employees carried out the alleged manipulation, they also urged each other on and jointly celebrated the efforts, with one trader referring to a partner in the scheme as “superman.” “Be a hero today,” he urged, according the complaint by regulators.

In another facet of the case, UBS managers during the financial crisis also “inappropriately gave guidance to those employees charged with submitting interest rates, the purpose being to positively influence the perception of UBS’s creditworthiness,” according to authorities. At the time, when high borrowing costs pointed to poor financial health, banks were artificially depressing the rates to project a stronger image.

How Japan's Guilty Plea May Impact Future Negotiations in this Manipulaltion Case.   The UBS case provides a lens to view broader problems in the rate-setting process, which affects how consumers and companies borrow money around the world. In June, authorities scored their first Libor settlement, securing a $450 million payout from Barclays, the big British bank.

The UBS case — the product of cross-border collaboration among regulators and federal prosecutors – at $1.5 billion is more than triple the earlier fine.  The CFTC collects a $700 million penalty, the largest in the agency's history;  the U.K. FSA collects a $260 million fine. The Swiss Financial Market Supervisory Authority, which does not have the power to levy fines, recovered $65 million in the bank’s supposed ill-gotten gains.

Also important is the ability of The Justice Department's criminal division to arrange the guilty plea and a $100 million fine from the Japanese subsidiary, while striking a non-prosecution agreement with the parent company. That deal included a $400 million fine.

The Justice Department’s case also took aim at two of the bank’s former traders, including 33-year-old Thomas Hayes and Roger Darin, 41, of Switzerland.  Each was charged with conspiracy in a criminal complaint unsealed in Manhattan federal court. The Justice Department also charged Mr. Hayes, who traded from the bank’s Tokyo office, with wire fraud and price fixing, an allegation that stemmed from his suspected collaboration with traders at other banks.

The fallout from the UBS case is expected to ratchet up the pressure on some of the world’s largest financial institutions and spur settlement talks across the banking industry.

Much of the activity took place in the bank’s Japanese unit. Authorities said four UBS traders colluded to manipulate submissions to Yen Libor. The individuals made more than 1,900 requests to brokers and other banks to alter the rate, according to regulatory filings. As part of their efforts, UBS employees made quarterly payments of £15,000 ($24,000) to outside brokers involved in the rate-rigging for at least 18 months for their help, the complaint said.

To avoid arousing suspicion, UBS employees routinely made small changes to submissions, the complaint detailed. The individuals, who communicated with colleagues about the rate-setting through emails and instant messages, also altered rate submissions to benefit traders at other banks.

The Japanese unit’s guilty plea for wire fraud follows frantic last-minute negotiations last week between senior UBS officials and American authorities. By forcing the plea from the firm’s Japanese subsidiary, federal authorities sent a clear message about the level of wrongdoing, but stopped far short of shutting UBS out of the American markets.

Alas, the case presents the latest setback for UBS.  The Swiss bank already agreed to a $780 million fine in 2009 with American authorities to settle charges that it helped American clients avoid tax. The firm also announced a $2.3 billion loss last year related to illegal trading activity by a former employee, Kweku M. Adoboli. Mr. Adoboli subsequently was sentenced to seven years, and British authorities fined UBS $47.5 million over the scandal.

This is expected to produce a net loss for the 4th quarter of up to $2.7 billion.

In the wake of the Libor scandal, UBS has been forced to beef up its compliance and rate-setting procedures, according to the Swiss regulator. The bank has also fired individuals connected to the rate-rigging.

Other C-I postings today on the UBS settlement can be accessed, as follows: [ "UBS & Barclays Libor Settlements ..", BTN]     [UBS Traders Laughed All the Way to the Bank" in BTN]    [BS Agrees to Libor Manipulation Charges" , in WWW].

For further details, go to:   [ Dealbook, 12/19/12 ].