“We will never know the amounts of money involved, but it has to be the biggest financial fraud of all time,” says Adrian Blundell-Wignall, a special adviser to the secretary-general of the Organization for Economic Cooperation and Development in Paris. “Libor is the basis for calculating practically every derivative known to man.”
More than five years after alarms first sounded, regulators and prosecutors are closing in. UBS was fined a record $1.5 billion by U.S., U.K. and Swiss regulators in December for rigging global interest rates. Tom Hayes, 33, a former yen trader at the Zurich-based bank, was charged by the U.S. Justice Department on Dec. 20 with wire fraud and price fixing for colluding with brokers, contacts at other firms and his colleagues to manipulate Libor. Hayes hadn’t entered a plea as of mid-January, and his lawyers at Fulcrum Chambers in London declined to comment.
Barclays paid a 290 million pound ($464 million) fine in June to settle with regulators, and three top executives, including CEO Robert Diamond, departed. Other banks, including RBS, were negotiating settlements in early 2013, according to people with knowledge of the talks. RBS may pay as much as £500 million to settle allegations that traders tried to rig interest rates, two people with knowledge of the matter say. UBS and Barclays admitted wrongdoing as part of their settlement agreements. Spokesmen for the two banks, and for RBS, declined to comment.
The industry faces regulatory penalties of at least $8.7 billion, according to Morgan Stanley analysts. The European Union is leading a probe that could see banks fined as much as 10 percent of their annual revenue. Meanwhile, Libor is being overhauled after the U.K. government ordered a review in September into the way the benchmark is set.
The scandal demonstrates the failure of London’s two-decade experiment with light-touch supervision, which helped make the British capital the biggest securities-trading hub in the world. In his 10 years as chancellor of the Exchequer, from 1997 to 2007, Gordon Brown championed this approach, hailing a “golden age” for the City of London in a June 2007 speech. Brown, who later served as prime minister for three years, declined to comment.
Regulators have known since at least August 2007 that some banks were using artificially low Libor submissions to appear healthier than they were. That month, a Barclays employee in London e-mailed the Federal Reserve Bank of New York, questioning the numbers that other banks were inputting, according to transcripts published by the New York Fed. Nine months later, Tim Bond, then head of asset allocation at Barclays’s investment bank, publicly described Libor as “divorced from reality,” saying in a Bloomberg Television interview that firms were routinely misstating their borrowing costs to avoid the perception they were facing stress.
The New York Fed and the Bank of England say they didn’t act because they had no responsibility for oversight of Libor. That fell to the British Bankers’ Association, the industry lobbying group that created the rate in 1986 and largely ignored recommendations from central bankers after 2008 to change the way it was computed. Regulators also were preoccupied with the biggest financial crisis since the Great Depression, and forcing banks to be honest about their Libor submissions might have revealed they were paying penalty rates to borrow, which in turn would have further damaged public confidence.
Libor is calculated daily through a survey of banks asking how much it costs them to borrow in 10 currencies for periods ranging from overnight to one year. The top and bottom quartiles of quotes are excluded, and those left are averaged and made public before noon in London.
Because it’s based on estimates rather than actual trade data, the process relies on the honesty of participants. Instead of being truthful, derivatives traders sought to influence their own and other firms’ Libor submissions, with their managers sometimes condoning the practice, according to do ents and transcripts of instant messages obtained by Bloomberg.
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