A $1.5-billion fine is the outcome in the latest in a series of missteps by the bank UBS and evidence of a deepening scandal involving the setting of interbank borrowing rates.

The global ambitions of UBS, the Swiss investment bank, have come a cropper. Its settlement with U.S., U.K. and Swiss regulators amounts to $1.5 billion and is the fourth major scandal to hit the bank in the last eight years.

First, there was a botched attempt to enter the credit markets, culminating in a close to $37-billion write-down due to bad bets on subprime securities. Then came fines several years later to settle allegations that the bank's private wealth unit helped wealthy individuals evade taxes.

In 2012, the bank incurred over $2 billion in losses due to rogue trading. If, in the parlance of UBS chief Sergio Ermotti, changing the culture of a big bank is more akin to a journey than a one-off event, then UBS and its investors have trodden a tortuous path, indeed. Several heads have rolled due to past misdeeds and now comes the latest blow to the bank's crumbling edifice: manipulation of the LIBOR rate to rig trades to the bank's advantage and give it the appearance of greater financial strength during the global financial crisis of 2007-2009. After Barclay's admission of rate manipulation, UBS is the second bank to settle claims - on a much larger scale - and probably not the last (see The LIBOR Scandal).

What Happened?
The London Interbank Offered Rate is the reference rate set by banks off of which about $350 trillion of securities are priced including over-the-counter derivatives, credit cards and student loans. The process involves member banks submitting bids of rates at which they are willing to lend to their respective trade organizations (e.g. in London, Tokyo, Hong Kong, the European Union, etc.). High and low bids are discarded and the remaining two middle quartiles are averaged to arrive at the rate each business day. The process is referred to as the daily fix.

Banks have gamed the system to profit on trades and to make the bank appear financially healthier during the financial crisis - a practice referred to as lowballing and sanctioned by senior management. Traders, in collusion with their bank's rate submitters, interdealer brokers (intermediaries for banks to trade assets) and traders at other banks submitted false bids to avoid losses on trades that could have arisen from only a few basis points in the wrong direction. UBS' particular transgressions involving the tweaking of the Tokyo Interbank Offered Rate occurred in its Japanese subsidiary. Incentives were perverse. In exchange for their assistance in submitting such bids, interdealer brokers in particular were rewarded with wash trades for the sole purpose of paying them a commission - a practice that goes back several years.

The Bottom Line
A common thread in UBS' compliance failings would appear to be a lack of proper internal controls at the very least and even the turning of a blind eye, particularly in the case of the private wealth division. Repeated internal audits found no shortcomings. Electronic communications reveal a brazen risk culture where the malefactors acted with impunity. Two UBS traders were charged with conspiracy to manipulate rates. Collusive behavior among banks points to a widespread deficiency in industry best practices. An overhaul of the rate-setting process is warranted. Making such practices illegal may send a powerful message to banks or, perversely, incentivize them to find ways around a new obstacle. Sergio Ermotti's observation about cultural change being a journey could not be more spot on. It is going to be a long, maybe even interminable one, and not just for UBS.

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