The financial scandal that happens by UBS
— March 22, 2012
By Sebastian Dubas and Matilda Flour
Several agencies are investigating the handling of a reference rate for hundreds of billions of financial products, Libor. Banks would have kept artificially low so as not to appear vulnerable or make profits
Last Friday it was Credit Suisse. The day before, Deutsche Bank. A week earlier, Societe Generale and Barclays, and shortly before the U.S. Citigroup.
In fine print, often at the end of their annual report, the largest banks in the world eventually officially communicate the scandal Libor. The case hit the interest rate which is the standard in global finance, the Libor, which broke through the denunciation of a member of this agreement, UBS.
Specialists refer to this as "the greatest manipulation of history." Libor, the London Interbank Offer Rate, like Tibor, its equivalent in Tokyo also object of the cartel, is the benchmark for about 350 000 billion of financial products (100 times that manages the Swiss financial center) , as estimated by the British Bankers Association (BBA). There are credit cards, mortgages and floating rate Swiss amount of structured products. The Swiss National Bank uses it to conduct monetary policy.
But these benchmarks have been influenced by major banks, to their advantage. This is what the police suspect the markets in Europe, America, Japan and Switzerland. The Competition Commission (Comco) announced on February 3 the opening of its investigation.
Who denounced the agreement? The answer is on page 83 of UBS's quarterly report published on February 9. It reads: "UBS has received conditional immunity from authorities in several jurisdictions [...] regarding possible violations of antitrust or competition, in connection" with Libor and Tibor. Since then, Citigroup and Barclays have followed it, each hoping to limit possible fines.
These three institutions are part of a group of eighteen leading international banks providing every morning to the BBA the interest rate which they believe they can borrow from their counterparts in several installments and in multiple currencies (see below). They are suspected of having agreed to keep rates artificially low between 2007 and 2011. Its report covers not only the giants of international finance but also smaller institutions and hedge funds that would have been in the know.
The first suspicions of manipulation actually date back to the beginnings of the financial crisis. At a meeting of the Bank of England in November 2007, some experts are intrigued at the Libor rate "suspiciously low". Banks on the brink of bankruptcy and financial sector weighed down by the discovery of toxic products related to "subprime" should, in their opinion, logically lead to lower borrowing costs much higher.
A few months later, in April 2008, the Wall Street Journal wonders. The U.S. newspaper notes that the Libor rate remains oddly stable while many health indicators of the international financial system are deteriorating day by day. This is particularly the case of insurance contracts against default of a bank, whose prices are exploding. An analyst with Citigroup appears to have been dismissed in 2008 because he had publicly asked "The Libor is broken?" We read in a complaint.
The case grows March 15, 2011, through UBS. On page 318 of its 2010 annual report, the bank recognizes that it has been subpoenaed by U.S. and Japanese financial authorities in a case of manipulation of interest rates. A first civil complaint is then deposited in the United States by three asset management companies. On 26 July 2011, UBS wrote that it is cooperating with regulators of both countries. In exchange for information on alleged manipulation of Libor and Tibor, the Swiss bank ensures power leniency of the authorities and partial immunity.
For Connan Snider, assistant professor of economics at UCLA, who studies this subject for several years, "we can assume that if a bank agrees to cooperate, this amounts to an implicit recognition of the illicit practices that may have occurred." However, nothing prevents the establishment is forced to compensate the companies or individuals who pursue it. Moreover, the "conditional immunity will not prevent private parties to bring civil suit against us," wrote UBS.
Civil claims are increasing. UBS, Credit Suisse and nine other financial institutions are under attack in the United States in August 2011. Contacted, UBS sticks to the paragraph of its Annual Report and Credit Suisse said it had been informed of the investigation by the Competition Commission and that it "fully cooperating" with authorities in this matter.
Charles Schwab is responsible for pursuing these eleven banks. The press and international surveys have alerted the American Society of online brokerage tricks possible on Libor. But it is self-reporting that UBS has decided to turn to justice and to bring the matter before the Court of San Francisco last August. In a paper of forty pages, Charles Schwab believes that banks have been implicated in illegally harvested 'hundreds of millions, even billions, of dollars. " The detriment of other companies or individuals, "In undervaluing the actual borrowing costs, banks have misled investors about their financial health," said a spokesman.
Whether guilty or not, the banks had several advantages to be gained from the agreement during the Libor. Caught in the midst of the financial crisis, the institutions would have liked to keep rates low to avoid alarming markets more on their own health. A base rate up sharply would have alerted investors.
Today, however, this explanation is challenged by experts. Some banks were induced to change the course of Libor in their favor because of the importance of its variations to their portfolios. "The Chinese Wall, which should separate treasury operations, sending Libor rates, those brokerages, whose products relate more or less depending on the rate, has been shot," says Connan Snider. Traders would therefore suggest to colleagues went to submit favorable rates to their portfolio.
"In 2009, Citibank said it would pocket $ 936 million if interest rates fell by a quarter point per quarter for one year. Gain amounting to 1.935 billion even if they fell by 1% immediately, "we read in a complaint.
Other assumptions about the reasons of manipulation emerged. "It's hard to believe that eighteen banks have had interest, exactly the same time, to see the Libor decrease or increase," says Rosa Abrantes-Metz. This professor from the Stern School of Business at New York University puts forward another explanation: "In terms of investment and risk reduction, it is a huge advantage to know in advance which way the rates evolve the next day. "
On the customer side, no expert ventures to calculate their potential losses. First, because it will demonstrate that the Libor has been tampered with. Then because it will estimate the damage to hundreds of billions of products. Or gains. For if the rates were actually undervalued, mortgage holders have benefited by paying less than they should have.