UBS has agreed to pay $1.5 billion to settle regulatory charges that it manipulated the London Interbank Offered Rate ("LIBOR"). LIBOR is the average interest rate that leading London banks estimate that they would be charged to borrow from other banks. It appears that dozens of UBS employees were involved in a sustained, wide-ranging and systematic scheme to rig LIBOR and other benchmark interest rates in an effort to increase UBS's trading profits and to improve the outside perception of UBS's own financial health. UBS has acknowledged the charges.
Interest rates on hundreds of trillions of dollars of loans and other financial contracts are pegged to LIBOR and other interest-rate benchmarks, such as EURIBOR (Euro interbank offered rate) and TIBOR (Tokyo interbank offered rate). These rates determine everything from the values of complex derivatives to the monthly interest rates many people pay on their home mortgages and auto loans. Central banks also rely on the rates to help determine their monetary policies. Even small movements in these rates affect investment returns and borrowing costs.
The investigation into the manipulation of LIBOR and other interest-rate benchmarks has been going on for several years. Earlier this year, the British bank Barclays agreed to a$450 million settlement over LIBOR rigging.
Regulators describe the scandal as "epic in scale," with dozens of traders and managers in a UBS-led ring of banks and brokers conspiring to skew interest rates from 2005 through 2010. This latest massive financial scandal involving trillions of dollars in loans undermines the integrity of the worldwide financial system, and it comes on the heels of the black eye that the financial industry suffered for its involvement in the sub-prime fallout and the ensuing multi-hundred-billion-dollar TARP bailout of banks.
UBS traders apparently dangled rewards, such as cash or favorable trading opportunities, to coax employees at other banks to participate in the rate manipulation. About a dozen banks remain under investigation, and additional settlements are expected in coming months and years.
Fannie Mae and Freddie Mac are believed to have lost more than $3 billion as a result of banks' LIBOR manipulation. Dimond Kaplan & Rothstein, P.A. currently represents several clients in pending class actions filed against the offending banks. DKR's clients suffered financial damages in derivatives investments, such as Euro-dollar futures, that were affected by interest rate manipulations.