UBS: $1.5 Billion LIBOR Settlement

Econintersect:  Another mega bank is making a cost of doing business payment to the Swiss bank regulator FINMA (Financial Market Supervisory Authority, FSA (UK Financial Services Authority)  and the U.S. Department of Justice and the CFTC (Commodities Futures Trading Commission).  The total cost of all three settlements for the Swiss giant UBS (NYSE:UBS) exceeds CHF 1.4 billion, with the bulk of the payments going to the U.S. authorities ($1.2 billion).  The cost to UBS is significantly larger than the settlement of $450 million for Barclays Bank.  It is also more than 50% larger than the $1 billion settlement cost estimated four days ago (GEI News).

Here is a summary from the UBS press release distributed by Business Wire:

• UBS agrees to pay approximately CHF 1.4 billion¹ in fines and disgorgement to US, UK and Swiss authorities to resolve LIBOR-related investigations.

• As part of a proposed agreement with the US Department of Justice (DoJ), UBS Securities Japan Co. Ltd. (UBSSJ) has agreed to enter a plea to one count of wire fraud relating to the manipulation of certain benchmark interest rates, including Yen LIBOR.

• UBS is making progress in risk-weighted assets (RWA) reduction in the fourth quarter and expects its fully applied Basel III common equity tier 1 ratio to be roughly in line with the third quarter’s level of 9.3%², and net new money in UBS’s wealth management businesses is expected to be positive.

• UBS believes its fourth quarter net profit attributable to shareholders will show a loss, primarily as a result of provisions for litigation and regulatory matters.

Here is a significant description of what has transpired excerpted from the UBS press release, along with some “throw the employees under the bus” remarks by UBS executives:

The conduct described in the settlements includes the following:

• Certain UBS personnel engaged in efforts to manipulate submissions for certain benchmark rates to benefit trading positions;
• Certain employees at the bank colluded with employees at other banks and cash brokers to influence certain benchmark rates to benefit their trading positions; and
• Certain personnel gave inappropriate directions to UBS submitters that were in part motivated by a desire to avoid unfair and negative market and media perceptions during the financial crisis.

The conduct encompassed by the settlements includes Yen LIBOR, GBP LIBOR, CHF LIBOR, Euro LIBOR, USD LIBOR, Euribor and Euroyen TIBOR, although the nature and extent of the conduct in question varied significantly from one currency to another.

The Board of UBS Securities Japan Co. Ltd., (UBSSJ) has authorized UBSSJ to enter a plea to one count of wire fraud relating to the manipulation of certain benchmark interest rates, including Yen LIBOR. The Board of UBS AG has authorized the firm to enter into a Non-Prosecution Agreement (NPA) with DoJ relating to UBS AG and all of its subsidiaries and affiliates, except for UBSSJ.

Today’s resolutions stem from industry-wide investigations into the setting of certain benchmark rates across a range of currencies. These investigations have focused on whether there were improper attempts by banks, either acting on their own or with others, to manipulate LIBOR and other benchmark rates at certain times.

UBS has fully cooperated with the authorities in their investigations and significantly enhanced its control framework for its submissions process for LIBOR and other benchmark interest rates. The investigations by other governmental authorities and private litigation referred to in our third quarter 2012 report remain ongoing notwithstanding today’s announcements.

UBS CEO Sergio Ermotti said: “During the course of these investigations, we discovered behavior of certain employees that is unacceptable. Their misconduct does not reflect the values of UBS nor the high ethical standards to which we hold every employee. We have cooperated fully with the authorities and taken decisive and appropriate actions to correct the issues and to strengthen our control processes and procedures. We deeply regret this inappropriate and unethical behavior. No amount of profit is more important than the reputation of this firm, and we are committed to doing business with integrity.”

UBS Chairman Axel Weber said: “The Board and I have zero tolerance for inappropriate and unethical behavior of any of our staff. We appreciate that the authorities have recognized UBS for the thoroughness of our investigation and our exceptional cooperation. We are pleased that the authorities gave us credit for the important and positive changes we have already made. Our credibility with clients, investors and employees is critical and therefore we have to continue to strengthen the firm’s operations, culture and awareness of risk.”

Despite the expected payments announced today, UBS remains one of the best capitalized banks in the world.

John Lounsbury

Sources:

• UBS Board of Directors authorizes settlements of LIBOR-related claims with US and UK authorities; Swiss regulator to issue order (UBS press release via Business Wire, 19 December 2012)

• UBS to pay SFr1.4bn in Libor settlement (James Shotter and Brooke Masters, Financial Times, 19 December 2012)

• LIBOR Scandal: Another Billion of Chump Change (GEI News, 14 December 2012)