Just when it appeared global banks’ transgressions couldn’t get worse, UBS (UBS) has broken new ground. In its $1.5 billion settlement with various countries, UBS admitted to thousands of instances of interest-rate manipulation, involving more than 100 employees and managers, in currencies including the yen, the pound, the Swiss franc, the U.S. dollar, and the euro. The actions affected the London interbank offered rate, the global benchmark that influences the value of hundreds of trillions of dollars in mortgages, corporate loans, and derivatives.
What sets UBS apart is not only the extent of the behavior but also the level of collusion with traders at other banks and the outright bribery of brokers who helped coordinate the manipulation.
One instance, which we’ll call the “captain caos” scheme, deserves its place in the hall of fame of financial chicanery. According to the final notice from Britain’s Financial Services Authority, traders at UBS colluded with their peers at other banks “by entering into facilitation trades that aligned their respective commercial interests” so they could all benefit from manipulating interest rates in the yen.
According to the FSA notice, one UBS trader promised the following to a broker aiding in the conspiracy: “I’ll pay you, you know, 50,000 dollars, 100,000 dollars … whatever you want … I’m a man of my word.” The spelling-challenged traders and brokers who took part in the scheme came to address one another with monikers such as “the three muscateers” and “captain caos.”
Some lower-level traders and brokers in the U.K. have already been arrested, and charges have been brought against two individuals in the U.S. Investigators would do well to pay closer attention to the involvement of executives: Given the pervasiveness of the misbehavior and how long it lasted, it’s hard to imagine executives were clueless. The FSA notice says at least five senior UBS managers were aware of the manipulations to benefit the bank’s trading positions. In the U.S., conspiracy to commit fraud is a crime, carrying a prison term of as much as five years.
The $1.5 billion in fines for UBS, more than triple the amount U.K. bank Barclays (BCS) agreed to pay in a settlement in June, brings the total levied this year on big European banks for various misdeeds to $6.1 billion, according to Bloomberg News. Making banks pay handsomely for their sins is an entirely appropriate way to signal that such behavior won’t be tolerated. Criminal indictments, though, would do more to change the culture at big banks and to restore faith in markets.