UBS and the LIBOR scandal

22 / 02 / 2013
Category: Blog

Today’s top business story is that UBS is being fined a record $1.5 billion for their part in the LIBOR scandal. This may seem quite a lot of money, but it may appear to be a penalty distributed unfairly.

First of all, how much damage was done? The sheer impact on the world was staggeringly high. LIBOR is the basis for $350 trillion face value of global debt. A single basis point (0.01%) mis-statement therefore causes a change in interest payments of $35 billion per year. Hence the UBS fine is equivalent to a near microscopic adjustment for around a fortnight. If the mis-statement was 1% (nearer the mark, more likely) then the fine represents the impact of the difference over a mere 3 hours 45 minutes.

Now, who pays? Well, lots of people do. First and foremost, the shareholders do. However, there are few shock-horror revelations happening here regarding banking culture: a bank makes operating cash flows in very different ways to, say, the manufacturer of chemical lavatories. Assuming the accounts have a justifiably clean audit report, it boils down to caveat emptor – investors must do the analysis.

The employees at the bank suffer through lost bonuses and reduced equity. Evidently, staff are not all innocent, and one could argue that many bank cultures are pervasive rather than confined to a single desk. However, it is most likely the vast majority of employees are not connected to the LIBOR debacle any more than they were to the previous, or next, scandal.

The taxpayers also suffer. There is the direct loss to the Exchequer of income, capital gains and corporation taxes caused by lower bonuses, share prices and profits. Until recently there was also the moral hazard cost: taxpayers have unwittingly written put options on the entire banking sector, for premiums (tax) that have shrivelled in recent years.

Most people reading this posting will have signed up to a stringent set of ethical standards, including one relating to market manipulation, II(B): “… must not engage in practices that distort prices … with the intent to mislead market participants …”, and I hope take their responsibilities seriously. Sadly, not all bankers are bound by the CFA Standards of Professional Conduct, and business decisions can boil down to profit vs ethics. If we press the big DO-NOT-PRESS red button, more cash comes in. Sorry, what did that button say, were we supposed to read it?

The penalties ought to be meted out to those who should know better. The perpetrators, the direct supervisors, the risk managers, and ultimately the directors, should be in no doubt that the next scandal will land them in prison and/or the bankruptcy court, with their finance careers ended forever. And this should be the norm, not the exception. Mr Adoboli ought to be in good company.

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