For anyone who hasn’t been paying close attention to the unfolding LIBOR scandal involving 20 of the world’s most important banks, they would be forgiven for not realizing that another major settlement is nearing agreement with one of the key players in the ongoing drama. UBS (NYSE:UBS) is avoiding making direct comments about the case, but it is believed that the Swiss-based bank will pay nearly $500 million to settle claims that its traders and staff engaged in a scheme to manipulate LIBOR rates by submitting rate information that was in fact inaccurate at the time. The bank has conducted its own internal investigation that has resulted in 25 or more employees leaving the firm with more expected as the date draws nearer for settling the lawsuit. The investigation sparked outrage and criticism as the impact from manipulated LIBOR rates became better understood around the world. LIBOR is used as a benchmark to set rates for student loans, auto loans and mortgages and many other financial instruments that total $ 300 trillion. The Washington Post wrote that “Regulators are focusing on whether UBS traders colluded with other banks to influence rates in an effort to increase profits.”
Not The Only Bank In Trouble
The prosecution of UBS comes on the heels of a $ 465 million settlement that Barclays (NYSE:BCS) bank, the second largest bank in the U.K. paid back in June to escape further liability for their actions. The initial investigation with Barclays paved the way for the more expanded review of the world’s 20 largest banks which over time has proved to be both challenging and politically-sensitive as many of the banks are their nation’s most important institution. The June settlement talks with Barclays resulted in a record fine (at the time) and much hand-wringing as to how this could have gone on for so long at so many banks. In the U.S., regulators pledged to take banks to tasks for their role (if any) in the rate-rigging scheme that may have resulted in consumers being over-charged for any interest rate-driven debt instrument during the years that the misconduct is believed to have taken place.
Expecting The Worst-Case Outcome
UBS executives have allocated funds to pay for the legal expense and the regulatory fines stemming from the matter since it was first disclosed that the bank was involved in the probe. To date the bank has saved $ 970 million for such expenses and most likely will need the majority of that reserve to pay attorney’s fees and forensic accountants who have worked non-stop on the investigation for months. The bank has become somewhat accustomed to dealing with high-profile problems in the wake of several expensive mistakes in past years. One major failing was when a trader was discovered to have made trades that lost billions of dollars for the bank and cost then-CEO Oswald Grubel his job. His successor Sergio Ermotti has focused on cutting costs and streamlining business units. One element of the change has been the reduction of headcount through 10,000 employees getting pink slips.
Keeping It All Together
The challenge for the banking giant is to preserve its top-shelf image as advisor and private banker to the world’s most-wealthiest people. That image has been tarnished over time as scandal and tax shelter investigations seemed to have plagued the firm for years on end even as the executives have worked toward transitioning the bank from its once-stodgy investment bank persona. The era of increased regulation and heightened scrutiny has coincided with the global economy’s seemingly endless recovery cycle continuing unabated. Shareholders of UBS have watched as it shares have recovered nearly all of its losses in the past 12 months, but still are lagging their peers as the LIBOR settlement draws to a quiet close.