U.S. and British regulators announced a $612 million settlement Wednesday with Royal Bank of Scotland, with the global bank acknowledging that it had manipulated key benchmark interest rates to benefit its trading positions in unregulated markets.
The action against the bank by the U.S. Commodity Futures Trading Commission brought the penalties it's levied against global banks in the ongoing scandal over the manipulation of interest rates to $1.2 billion. Royal Bank of Scotland agreed Wednesday to pay the commission $325 million, the Justice Department $150 million and Britain's Financial Services Authority $137.1 million. Global banks have now paid the Justice Department more than $810 million in the investigation.
As part of the settlement, the bank's subsidiary RBS Securities Japan Limited pleaded guilty to a single charge of wire fraud with intent to defraud counterparties. The British government owns 80 percent of Royal Bank of Scotland, taking its stake in a rescue of the bank during the global financial crisis.
What made Wednesday's settlement stand out was titillating instant-message traffic secured by the enforcement staff at the Commodity Futures Trading Commission.
In one message that involved the trading of Swiss francs, a trader seeks a manipulated rate and coos, "If u did that I would come over there and make love to you."
The messages show brazen market fixing and no remorse over manipulative behavior in financial markets. They also show that the bank had traders and employees who submitted its interest rates working together on the same desk.
"That's a smack in the face of market integrity," David Meister, the commission's director of enforcement, told McClatchy.
The probe grew out of a scandal that first involved Britain's Barclays PLC, which admitted last June that its traders had manipulated what's known as the London Interbank Offered Rate, or Libor, a benchmark interest rate collectively set by 18 global banks in London and used as a reference for trillions of dollars in loans across the globe in 10 major currencies.
Barclays agreed to penalties from U.S. and British regulators of about $450 million. The Swiss bank UBS settled with U.S., British and Swiss regulators in December for $1.5 billion.
Three American banks - Bank of America, Citibank and JPMorgan Chase - take part in setting the dollar-denominated Libor rate, an average of interest rates that's the primary benchmark for short-term interest rates around the world. They haven't faced charges, and regulators wouldn't say whether they're under investigation. But Assistant Attorney General Lanny Breuer made it clear in a statement Wednesday that the industry probe continues.
"These are extraordinary results, and our investigation is far from finished. Our message is clear: No financial institution is above the law," he said.
The manipulation involved driving the Libor rate up or down, depending on a bank's position in bets made in what's called the over-the-counter market. Those unregulated markets trade in complex financial products called derivatives. The 2010 revamp of U.S. financial regulations called for this trading to come into the light, but the implementation has been slow and complicated.
Libor rates were widely used before the U.S. financial crisis of 2008, which was brought on by problems in the housing sector, to determine the interest rates to which adjustable-rate mortgages - many of them given to the weakest borrowers - would jump after the expiration of low teaser rates.
In Wednesday's case, Royal Bank of Scotland was charged with manipulating the process of setting the Libor rate for loans denominated in the Japanese yen and the Swiss franc. The Commodity Futures Trading Commission said the bank's traders had manipulated the benchmark lending rates in periods that stretched from mid-2006 to 2010, and that this unlawful conduct had continued even after the traders were aware that the commission was investigating the bank.
Knowing that they were under investigation late in the process, the traders agreed to move their conversations from instant messaging to the telephone. But, Meister said, they chose a line that the bank taped, and enforcement officials were able to access those recorded conversations.
What's remarkable about the manipulation is that the traders were so open about it in instant messages. In many messages, the traders are asking the bank to set its rate at a made-to-order level and sometimes in line with what other banks said they'd do.
In one instant message that the Commodity Futures Trading Commission shared, a senior trader involved in foreign exchange markets and the Japanese yen tells another trader that "its just amazing how libor fixing can make you that much money."
In another message, a senior trader says that the British Bankers' Association, which collects the submitted interest rates from banks, called and the trader at the other end of the mail asks whether it was to complain. The senior trader responds that the association was calling about the six-month rate, "just to make sure i was happy with it."
The other trader says some other bank must be unhappy, and the senior trader responds that "he called b4 any of the other banks saw our data at about 11:15 to check it was ok."
It all sounds like a Hollywood script, and it's what many critics of Wall Street imagined that the email traffic of big global banks might sound like.
"It looks like the type of thing you'd expect in a big blockbuster Hollywood movie, because it is so over the top in its complete disregard that their actions are going to have on average people and their lack of concern for the public well-being and their assumption that rules are for suckers," said Barbara Roper, the director of investor protection for the Consumer Federation of America, a watchdog organization.
What troubles Roper is how the message traffic exposes the culture thought to be rampant in financial markets.
"To the degree that that is the culture of our financial system, we should expect to continue to be beset by these scandals and calamities on a regular basis," she said. "How do you respond in an effective way to rein in this system, if this is the attitude that's reflected in the day-to-day actions of these financial institutions?"
Added Meister, the Commodity Futures Trading Commission's enforcement chief, "What we try to do is make high-impact cases that will influence market behavior. And I would consider this case (and the Barclays and UBS settlements) high-impact cases. If you read public comments by senior bank officials, they are saying out loud that they get it. If that's the case, we're doing our job."
The collective fines in the Libor probe reflect records for the commission, but they aren't crippling for the banks. For example, Barclays reported that third-quarter 2012 pretax profits were up almost 30 percent, the quarter after it was socked with what then was a record fine from the commission.
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