Corruption, bribes, collusion, panic and downright stupidity – the tale of UBS’s scandalous Libor rigging between 2005 and 2010 reads like a modern crime thriller.At least 45 individuals at the Swiss investment bank were part of a racket that manipulated the market “in various locations around the world, including Japan, Switzerland, the UK and the USA”, the Financial Services Authority (FSA) said. A number of brokers at smaller houses became UBS’s paid flunkeys, and rival traders colluded for a share of the spoils.
Those spoils, though unquantified, were potentially huge. Libor is a benchmark interest rate used in transactions worth $500 trillion (£310 trillion) globally, so even the tiniest market wriggle can have enormous implications. One UBS manager in October 2008 admitted that a single basis point move in Libor – or 0.01pc – would be worth $4m to the bank. For traders, a basis point could mean the difference between splashing their bonus on a yacht or a dinghy.
UBS began manipulating inter-bank borrowing, or Libor, in early 2005 – with traders making false submissions to the organisations that compiled banks’ offers to set the daily rate.
By 2007, though, UBS’s rigging was industrial in scale – with “illicit fees” paid to brokers that ran into hundreds of thousands of pounds and deals struck with rivals so that everyone would have the chance to cash in. The scale of the abuse was on a radically different level from that at Barclays, which is why UBS’s £940m fine was more than three times bigger.
The mastermind behind some of the most egregious cases at UBS was the 33-year-old Tokyo-based Briton Tom Hayes, identified in the FSA’s notice only as “Trader A”.
On one occasion, according to the FSA, Mr Hayes had “particularly large trading positions” tied to Japanese Libor that matured in early 2007. To profit, he needed Libor to remain high initially and fall just before the positions closed.
UBS on its own would have struggled to move Libor, so Mr Hayes got in touch will six colleagues at rival banks to help. On January 19, 2007 he asked a trader at “Panel Bank 3” to help keep Libor high, adding: “Anytime I can return the favour let me know as the guys here are pretty accommodating to me.”
Mr Hayes wasn’t lying. Five days later, he asked his manager, Roger Darin, a 41-year-old Swiss national, to “try to keep 6m [six month] and 3m [three month] libors up”. Mr Darin, known to the FSA as “Manager A”, replied: “Standing order, sir.”
Two months later, when he needed Libor to fall, Mr Hayes turned to Mr Darin again, who said. “I dun [sic] mind helping on your fixings but I’m not setting libor 7bp [basis points] away from the truth, I’ll get UBS banned if I do that.” “Unbiased” Libor, he added, would be 0.69pc. That day, it was set at 0.67pc – a more respectable two basis points “away from the truth”.
Closing his final positions the following month, Mr Hayes recruited a colleague at “Panel Bank 4”. Expressing his gratitude afterwards, he said: “That’s beyond the call of duty! I wish I was there!” Mr Hayes did not leave much to chance, though. He also had help from a broker friend.
Brokers were integral to Mr Hayes’s rigging campaigns. Because they provided the banks with intelligence on where others were likely to set Libor, they wielded significant influence over final decisions. And Mr Hayes had at least five brokers on side, “spoofing” the market as they played what they called the “Libor game”.
In an exchange in September 2008, he told one: “If you keep 6s [six month Libor] unchanged today… I will —-ing do one humongous deal with you … I need you to keep it as low as possible … if you do that … I’ll pay you 50,000 dollars, 100,000 dollars… whatever you want… I’m a man of my word.”
He made sure brokers were kept happy. Using a system of “wash trades”, which were pointless for UBS but created cover to pay brokers, Mr Hayes created £170,000 of “illicit fees” for a single firm, the FSA said. “In addition, UBS made corrupt payments of £15,000 per quarter to brokers to reward them for a period of at least 18 months,” it added. That’s another £108,000. One broker alone received £5,000 per quarter for his “fixing service”.
After the credit crisis struck in August 2007, survival instincts took over and UBS’s motivation changed. In an email on August 9, 2007 that appeared to admit the bank had been rigging Libor for profit but would now only rig for self-preservation, one manager told his seniors: “It is advisable to err on the low side with fixings for the time being to protect our franchise in these sensitive markets. Fixing risk and PNL [profit] thereof is secondary priority for now.”
Even so, another manager asked four months later for an exception to be made for Japanese Libor because “I don’t think anyone’s really got their eye on UBS’s yen fix”. Putting in a higher submission would be worth $500,000 to UBS, he explained.
Traders may have orchestrated rate rigging, but managers were complicit and the problem was institutional. UBS treated Libor manipulation as a benign profit source. Controls were pathetic. Unlike Barclays, where submitters were distinct from traders, at UBS the traders were the submitters despite the “inherent conflict”, as the FSA put it.
In 2009, following regulatory demands, UBS finally split the roles, but the abuse continued. Five internal audits between 2005 and 2010 failed to spot any wrongdoing and the bank’s systems did not pick up a single “wash trade”.
UBS can’t even argue it was duped by highly sophisticated individuals. In fact, the opposite seems to have been the case. In June 2009, on “a public chat group with 58 participants”, one submitter openly asked colleagues if any would like him to rig Libor for them.
After a manager later privately warned him to “be careful, dude”, he conceded: “I agree we shouldn’t have been talking about putting fixings for our positions on public chat.”
By then, the die had been cast.