Investigations into the LIBOR manipulation scandal will overshadow earnings season as the theatrics of who knew what plays out across a global stage. The LIBOR rate, which is the key rate for financial products ranging from personal credit cards to derivatives, has a wide-scale effect. The ramifications of fines, and possible charges of what's been called the biggest consumer fraud in history, are simply the next stumbling block in an industry plagued by chicanery.
Former UBS (NYSE:UBS) executives were questioned at the British Parliament for their role in failing to detect the LIBOR manipulations. The panel called the former executives incompetent and negligent. The executives claimed they only learned of the rate-rigging when the Department of Justice, the Commodity Futures Trading Commission, and international regulators began investigating the bank. The investigation ultimately revealed global benchmark rate manipulation from 2002 through 2010. UBS paid $1.5 billion for its role in the scandal.
RBS investors cry "witch hunt"
Amid reports that Royal Bank of Scotland (NYSE:NWG) will slash executive bonuses to pay as-yet-undetermined fines for its role in the rigging, major shareholders are demanding incentives to retain the current chief executive, Stephen Hester.
The bank, which is mostly taxpayer-owned, will also reclaim past bonuses from those directly involved in the scandal. Sky News reports that several executives at RBS are expected to be asked to step down as part of the upcoming settlement, regardless of their lack of knowledge of the scandal.
There is precedent for resignations as part of LIBOR investigations; Barclays (NYSE:BCS) chief executive Bob Diamond stepped down in July, and other executives quickly followed suit. However, RBS shareholders are fighting for the company's executives, demanding not only that they be allowed to remain at the company, but also that long-term incentives be put in place.
Profits over loses
Deutsche Bank (NYSE:DB) has been the target of its fair share of outrage, as a Wall Street Journal article last week found the bank made a $654 million profit betting on microscopic changes in the LIBOR rate, even as the interest rate was constantly changing. The bets were risky, even for the bank known for taking risky bets. And German regulators are calling for the release of the results of an investigation into Deutsche Bank's involvement, contrary to broad German laws aimed at protecting corporate secrets. However, critics are saying the law contravenes the public's right to understand the full nature of the manipulation.
The $654 million figure puts into perspective the ultimately insignificant fines these banks are facing for their roles. Barclays was fined $467 million last June. UBS paid $1.5 billion. RBS is expecting to pay several hundred million. However, these fines, as the DB instance shows, may not even make a dent against what the banks made in the rigging. And they certainly won't be enough of an incentive to prevent such shenanigans in the future.
Whence the pain comes
While regulators may never unearth the full extent of the profits and losses from the LIBOR manipulations, private companies and municipalities are already starting to figure it out. UBS and Barclays are among the more than 20 banks named in a lawsuit by several counties and public entities in California for losses related to the LIBOR rate manipulation. A lawyer in New York has filed a lawsuit on behalf of more than 20 states on behalf of wounded investors. The Chicago Public School Teachers' Pension & Retirement Fund are looking at the hit to its $9.7 billion pension account. Fannie Mae and Freddie Mac are estimating losses of $3 billion over a two-year period during the scam and are exploring legal options against the banks. Other federal agencies are expected to follow suit.
It's only after the dust of those lawsuits has settled that the true sense of the ramifications of the LIBOR scandal will be felt. But if the past is prologue, by the time that happens, there will be another scandal well under way.
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