The fallout from the London Interbank Offered Rate (LIBOR) scandal continues apace with the announcement on Wednesday that the Royal Bank of Scotland (RBS) had reached a $US612 million settlement with the UK’s Financial Services Authority, the US Commodity Futures Trading Commission, and the US Department of Justice, regarding accusations it had manipulated LIBOR.
Like the settlements with Barclays and UBS that have preceded it, the misconduct at RBS is linked to a failure of compliance and culture. The deferred prosecution agreement (DPA) notes that not only did RBS lack a compliance program sufficient to detect and prevent such conduct, but it placed derivatives traders and submitters together at the same desk, magnifying potential conflicts of interest. Even when separated, the misconduct continued through an internal instant messaging system. Extracts of instant messages between traders suggest that manipulation of LIBOR was both encouraged and tolerated by at least junior level managers within the bank, with a former employee bringing an action in Singapore for wrongful dismissal on the basis that the bank condoned the manipulation.
Despite the magnitude of the fine, the market reacted favourably to the announcement, with shares in RBS rising 1.3% upon the announcement. There are a number of possible explanations. First, the RBS' misconduct was relatively low in contrast to Barclays and UBS. RBS traders were attempting to manipulate the rate for personal gain, in contrast to Barclays, where senior management tried to make the bank look healthier during the 2008 financial crisis. Second, RBS is 82%-owned by the British government. Bailed out with the largest-ever rescue effort in 2008, any significant fine imposed by the regulators would be punishing the British taxpayer. As a pre-emptive measure, the RBS has confirmed that the financial impact of the settlement will be cushioned through recouping £300 million from a reduction in pay and bonuses of approximately 1,500 senior staff in its global markets division. Third, the fine fell short of expectations.
Any sense of closure in relation to RBS should be cautioned, as the regulatory fine is likely to dwarf any civil penalties. According to the DPA, RBS made hundreds of attempts between 2006 and 2010 to manipulate the Yen and Swiss Franc LIBOR rates and made false LIBOR submissions, with a dozen of the bank’s employees involved in the trades. “It’s just amazing how LIBOR fixing can make you that much money … it’s a cartel now in London” wrote one RBS Yen LIBOR trader in an instant message in August 2007. The DPA states that a series of electronic transactions links RBS traders to those at other banks, particularly Swiss bank UBS AG. UBS has already been fined $US1.5 billion and two of its traders have been charged by US regulators in connection with the scandal. This third settlement leaves little doubt that the collusion among banks and between banks and money market brokers is both widespread and systemic.
Following the initial Barclays settlement, numerous lawsuits have been filed against some of the world’s largest banks in connection with their alleged manipulation of LIBOR. Many of these cases are class action suits brought on behalf of a diverse group of plaintiffs including investment managers, lending institutions, derivatives users, brokerage firms and municipalities. Besides alleging that LIBOR-submitting banks artificially suppressed the published LIBOR indications and caused plaintiffs to earn a lower rate of interest on investments, some plaintiffs have also claimed that the banks conspired to suppress LIBOR.
Evidence of collusion between banks will be a crucial factor in determining the outcome of class action lawsuits. Given LIBOR’s centrality to interest rates on mortgages, credit cards, student loans, and other consumer financial products, the list of potential plaintiffs is potentially endless. Further, at least a dozen other banks, including Citigroup, JPMorgan Chase, Bank of America and HSBC face similar investigations. While the regulatory actions are settled, the civil cost of stacking the deck is, as yet, unknown.