December 1, 2023

DealBook: Leniency Denied, UBS Unit Admits Guilt in Rate Case

UBS accepted a $1.5 billion fine for its role in manipulating interest rates.Michael Buholzer/ReutersUBS accepted a $1.5 billion fine for its role in manipulating interest rates.

UBS on Wednesday became the first big global bank in more than two decades to have a subsidiary plead guilty to fraud.

UBS, the Swiss bank, scrambled until the last minute to avoid that fate. A week ago, in a bid for leniency over interest-rate manipulation, the bank’s chairman traveled to Washington to plead his case to the Justice Department, according to people briefed on the matter. Knowing the long odds, the chairman, Axel Weber, asked the criminal division for a lighter punishment.

But the government did not budge. With support from Attorney General Eric H. Holder Jr., the agency’s criminal division decided the bank’s actions were simply too egregious, people briefed on the matter said.

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On Wednesday, UBS announced it would plead guilty to one count of felony wire fraud as part of a broader settlement. With federal prosecutors, British, Swiss and American regulators secured about $1.5 billion in fines, more than triple the only other rate-rigging case, against Barclays. The Justice Department also filed criminal charges against two former UBS traders.

The guilty plea and the individual charges provide the Justice Department with a long-awaited case to prove it is taking a hard line against financial wrongdoing.

Since the financial crisis, the government has faced criticism that it has not brought significant criminal actions. The money-laundering case against HSBC, which averted indictment when it agreed instead last week to pay $1.9 billion, raised more concerns that the world’s largest and most interconnected banks were too big to indict.

With UBS, prosecutors wanted to send a warning.

The Justice Department’s decision stops short of imperiling the broader financial system because it shields UBS’s parent company from losing its charter, among other major repercussions. But by securing a guilty plea against a subsidiary, the department has shown that it is willing to punish severely one of the world’s most powerful banks. It was the first guilty plea from a major financial institution since Drexel Burnham Lambert admitted to six counts of fraud in 1989.

“We are holding those who did wrong accountable,” Lanny A. Breuer, the head of the Justice Department’s criminal division, said at a news conference on Wednesday. “We cannot, and we will not, tolerate misconduct on Wall Street.”

The rate-rigging inquiry, which has ensnared more than a dozen big banks, is focused on major benchmarks like the London interbank offered rate, or Libor. Such rates are central to determining the borrowing rates for trillions of dollars of financial products like corporate loans, mortgages and credit cards.

The fallout from the UBS case is expected to increase pressure on some of the world’s largest financial institutions and spur settlement talks across the banking industry. The Royal Bank of Scotland has said it expects to pay fines before its next earnings statement in February, while American institutions, including JPMorgan Chase, also remain in regulators’ cross hairs.

The UBS case highlighted a pattern of abuse that authorities have uncovered in a multiyear investigation into the rate-setting process. The government complaints laid bare a 10-year scheme, describing how the bank had reported false rates to squeeze out extra profits and deflect concerns about its health during the financial crisis.

“The settlement reflects the magnitude of the wrongdoing and how critical it is that these be honest and reliable,” said Gary S. Gensler, chairman of the Commodity Futures Trading Commission, the American regulator that opened the UBS investigation.

Six months ago, authorities did not seem ready to take an aggressive stance with UBS.

They had just scored their first Libor settlement, a $450 million payout from Barclays. UBS, which had already struck a conditional immunity deal with the Justice Department’s antitrust division, figured its penalty would be similar.

The immunity deal, some UBS executives contended, would protect the bank from criminal charges. Even officials at the Justice Department were skeptical about the prospect of levying large penalties, according to people briefed on the matter.

Then the tone shifted this fall. After examining thousands of e-mails and hours of taped phone calls, the agency’s criminal division concluded that the conduct at the Japanese subsidiary warranted a criminal charge.

Agency officials also cited the bank’s repeated run-ins with authorities. For example, the Swiss bank had agreed in 2009 to pay $780 million to settle charges that it had helped clients avoid taxes.

Not everyone in the Justice Department agreed on the course of action. According to people briefed on the matter, the antitrust unit pushed for less-onerous penalties, citing the cooperation of UBS. With officials split over how to proceed, Mr. Holder cast the deciding vote in favor of securing a guilty plea from the subsidiary.

The move caught UBS off guard. The bank dispatched dozens of lawyers to Washington to negotiate the fine print of the deal, setting up makeshift offices at the Four Seasons hotel in Georgetown.

Mr. Weber joined the lawyers, in a typical last-ditch appeal to the criminal division. Last Wednesday, Mr. Weber and his general counsel explained to the agency how UBS had overhauled its management ranks, bolstered internal controls and generally tried to clean up its act.

Mr. Breuer and other Justice Department officials agreed to consider the bank’s request to abandon the guilty plea, people briefed on the talks said. But hours later, a prosecutor phoned to say the agency was standing firm.

UBS agreed to the guilty plea, conceding that the Japanese unit would otherwise most likely face an indictment. In turn, prosecutors credited the bank for its recent efforts to improve.

“We are pleased that the authorities gave us credit for the important and positive changes we have already made,” Mr. Weber said in a statement.

The Commodity Futures Trading Commission adopted a similarly tough attitude.

Since Thanksgiving, UBS has tried to negotiate lower penalties with the regulator, according to people briefed on the matter. But David Meister, the agency’s enforcement chief, would not back down from $700 million in fines, an agency record.

“Even for a megabank, that amount serves as a direct deterrent,” said Bart Chilton, a commissioner at the regulator.

Authorities’ strict stance stems from the extent of the bank’s actions. The Commodity Futures Trading Commission cited more than 2,000 instances of illegal acts involving dozens of UBS employees across continents.

The most significant wrongdoing took place within the Japanese unit, where traders colluded with other banks and brokerage firms to tinker with yen-denominated Libor and bolster their returns.

In colorful e-mails, instant messages and phone calls, traders tried to influence the rates. “I need you to keep it as low as possible,” one UBS trader said to an employee at another brokerage firm, according to the complaint filed by the Financial Services Authority of Britain.

As the employees carried out the ostensible manipulation, they also celebrated the efforts, with one trader referring to a partner in the scheme as “superman.” “Be a hero today,” he urged, according the complaint.

The Justice Department also took aim at two former UBS traders, Tom Hayes, 33, and Roger Darin, 41, bringing the first criminal charges against individuals connected to the Libor case.

Like other traders at UBS, Mr. Hayes was willing to reward others for their efforts. He trumpeted the work of an outside broker who had helped, writing in a message, “i reckon i owe him a lot more.” Another broker responded that the person was “ok with an annual champagne shipment,” and “a small bonus every now and then.”

As prosecutors ramped up their investigation, Mr. Hayes even tried to dissuade former colleagues from cooperating, the complaint said. “The U.S. Department of Justice, mate, you know,” he said, they are the “dudes who…put people in jail. Why…would you talk to them?”

Mark Scott, Ashley Southall and Julia Werdigier contributed reporting.

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Merkel Signals Support for Italian to Lead E.C.B.

Mr. Draghi, an American-trained economist who is the governor of the Bank of Italy, finally won the crucial support of the German chancellor, Angela Merkel, after convincing her of his commitment to fiscal soundness.

Mrs. Merkel told the weekly newspaper Die Zeit, in an interview published Wednesday, that Mr. Draghi embodied German ideas about economic stability and that the government could support his candidacy to success Jean-Claude Trichet of France as head of the central bank.

Mrs. Merkel’s office confirmed the chancellor’s comments.

Her government found no plausible German candidate to propose after Axel Weber, former president of the Bundesbank, took himself out of the running, leaving the field to Mr. Draghi.

“He is very much in line with our ideas about stability and economic solidity,” Mrs. Merkel said of Mr. Draghi.

While markets will see her endorsement of Mr. Draghi as evidence that the European Union can overcome its internal politics to appoint the best-qualified candidate to a top position, her comments on Greece and its troubles will provide no relief for investors.

Speaking to reporters in Berlin, Mrs. Merkel indicated that there would be no decision on new help for Greece before June, at the earliest, after officials have compiled an assessment of the country’s economic situation.

“Greece is in focus,” she said. “Any kind of statement about what the situation there is and what we are going to do is something I can only do when I have the results of the mission on the table. I think it’s most important to go about this on a step-by-step basis.”

In that mission, officials from the European Commission, International Monetary Fund and European Central Bank will assess the reasons why the debt crisis in Greece has continued and will decide whether the government has honored its pledges to improve tax collection and to start a program to privatize €50 billion, or $71 billion, in state assets.

The officials will also examine whether the assumptions underlying the €110 billion E.U.-I.M.F. bailout of Greece last year were flawed. If they conclude that the country’s huge debt burden is strangling growth prospects, that would give euro zone countries little choice but to extend the term of the loans, reduce the interest rate, or start a process of voluntarily rescheduling some Greek government debt.

Ireland’s campaign to cut the interest rate charged on its bailout loans appears deadlocked, with France and Germany still determined to extract a concession from Dublin in return. At a summit meeting earlier this year, the new Irish prime minister, Enda Kenny, refused to agree to work toward creating a common corporate tax base for Europe, fearing that would ultimately threaten his country’s low 12.5 percent rate.

German lawmakers were to meet Wednesday to debate the country’s contribution to the euro zone’s third bailout, that of Portugal. Mrs. Merkel argued there had been “quite substantial progress” since 2010, when the debt crisis emerged.

“Obviously what we are doing is to lay the ground for the future,” she said “There is not as yet a satisfactory response as to how we deal with the sins committed in the past, but I think that the fact that we have looked those sins squarely in the face and tried to address them was already progress.”

German analysts are increasingly convinced that some form of debt restructuring or default in Greece is inevitable. Ferdinand Fichtner, senior research fellow at the German Institute for Economic Research in Berlin, argued that the sooner that takes place, the cheaper it would be for taxpayers.

“I think a haircut or partial default will be necessary, “ he said, “and my sense is that this is almost a consensus among German economists.”

“The problem over the last year is that private investors are being replaced by the European Central Bank and state-owned banks, and that will continue,” argued Dr. Fichtner. “If policy does not react quickly it will be more expensive for taxpayers. If we agree on a haircut later taxpayers will take a higher haircut,” he added.

Debt restructuring should take place before Mr. Trichet steps down at the E.C.B. to help preserve the credibility of the incoming chief, he added.

If anointed as expected in June, Mr. Draghi will begin his term with a reputation of being slightly less hard-line on inflation than Mr. Weber.

But Mr. Draghi, 63, who earned a doctorate in economics at the Massachusetts Institute of Technology, is certain to maintain the E.C.B.’s focus on price stability. He also enjoys an international reputation, in part because of his work as chairman of a panel that has been asked by the Group of 20 nations to find ways to avoid future financial crises.

Like Mr. Trichet, Mr. Draghi has the gravitas, stature and political savvy needed to interact on equal terms with European leaders. The crisis caused by debt problems in Greece, Portugal and Ireland has put extreme pressure on E.C.B. policy makers, who have often taken the lead in managing the crisis because of the difficulty that European Union leaders have in agreeing on fast action.

Jack Ewing reported from Frankfurt.

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