What's Missing in the RBS Settlement

Mark Whitehouse writes editorials on global economics and finance for Bloomberg View. He covered economics for the Wall Street Journal and served as deputy bureau chief in London. He was previously the founding managing editor of Vedomosti, a Russian-language business daily.
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There's something missing in the Libor settlements that the Royal Bank of Scotland Plc reached today with authorities in the U.S. and U.K. It's an omission that could impair investors' chances of recovering money lost due to banks' misbehavior.

Like Barclays Plc and UBS AG, RBS admitted that its traders sought to benefit their own positions by manipulating the London Interbank Offered Rate -- a transgression for which the bank will pay $612 million in fines. The misconduct occurred largely in Japanese-yen and Swiss-franc Libor, over a period stretching from October 2006 to November 2010.

Unlike Barclays and UBS, RBS didn't admit to a second, more institutional form of misbehavior: artificially and systematically lowering borrowing costs reported for the calculation of dollar Libor during the 2008 financial crisis. Banks engaged in this kind of manipulation to make themselves look healthier than they were. If enough banks did it, it could have led to a large and persistent understatement of a benchmark that influences the value of at least $300 trillion in loans, bonds and derivatives.

As RBS put it in a statement, there is "no finding that RBS suppressed LIBOR submissions at the direction of senior management."

The available evidence suggests RBS's submissions for dollar Libor were no less irregular than those of Barclays and UBS. During and after the demise of Bear Stearns in early 2008, for example, prices in the default-insurance market suggested investors saw RBS as a lot less creditworthy than other banks on the dollar Libor panel, such as Rabobank and Royal Bank of Canada. Yet during the month through April 16, 2008, RBS reported the lowest average three-month borrowing rate of the entire 16-bank panel.

Then, on April 16, 2008, the Wall Street Journal published a front-page story reporting concerns that Libor panel banks were understating their borrowing costs. Over the next three trading days, RBS increased its submitted three-month borrowing rate by nearly 0.2 percentage point, a very big move. Other panel banks also sharply raised their submissions, and UBS admitted that its shift was specifically a reaction to the Journal story. As a result, dollar Libor as a whole increased by about 0.2 percentage point. The size of the move suggests the crisis-related understatement could have had a much larger effect than manipulation by traders, who typically sought to push Libor one way or another by no more than a couple hundredths of a percentage point.

What transgressions banks admit to matters, because many of the civil lawsuits currently wending their way through the courts concern the second kind of manipulation -- that is, the systematic and persistent understatement of Libor. As Bloomberg View has noted, if dollar Libor was off by only 0.1 percentage point for a year, plaintiffs could potentially demand compensation for some $300 billion in losses, not counting punitive damages. To make their case, plaintiffs will most likely have to demonstrate that the banks' actions amounted to collusion. That will be a lot more difficult if enough of the panel banks, like RBS, say they didn't understate their borrowing costs in the first place.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Mark Whitehouse at mwhitehouse1@bloomberg.net