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The Bank at the Heart of the LIBOR Scandal

By Molly McCluskey – Feb 15, 2013 at 9:48AM

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Employees key to spreading rigging across banks.

The investigation into the LIBOR rate-rigging scandal continues, with regulators and investigators tackling each of the banks involved one by one. Barclays (BCS -5.98%) and UBS (UBS -3.81%) settled previously for their roles in the rate manipulation. Last week, Royal Bank of Scotland (NWG -9.15%) became the third bank to reach a settlement.

One count of wire fraud
On Friday, the CFTC released its report detailing the results of its investigation into Royal Bank of Scotland (RBS) for its role in the LIBOR rate manipulation scandal. The bank has accepted the findings of the report and said it will pay for half of the $612 million fine by pulling back executive bonuses from last year and curtailing them for this year. CEO Hester, who can earn up to the equivalent of $9.3 million in bonuses in addition to his $1.7 million salary, will still receive his bonus.  

RBS also was granted a deferred prosecution agreement in the U.S. for one count of wire fraud, and its Japanese securities business pled guilty to one count of wire fraud for its role in rigging Yen LIBOR. Twenty-one employees have been terminated, left prior to the settlement, or were  "discipli ned."

To date, $1.2 billion in U.S. fines have been issued for manipulative conduct related to LIBOR.

RBS' Rain Man
Among the findings is a name, one key figure who bounced from bank to bank, bringing with him the names of contacts around the world willing and able to rig the rate. Deemed the "Rain Man" for his brilliant but awkward demeanor, Tom Hayes has emerged as the force, or fall guy, for the scandal that affected the $350 trillion in financial products tied to the rate.

Not a few rogue traders
The report found more than a dozen traders involved globally and a nearly incestuous pattern of recruiting based on Hayes' knowledge and ability to change the LIBOR rate.

Banks named specifically in this pattern include RBS, Royal Bank of Canada, UBS, and Citigroup, which regulators say hired Hayes with full knowledge of, and in fact because of, his ability to manipulate the rate. UBS, which employed Hayes at the time, fought to keep him because of those same connections. As Hayes went, rate manipulation followed, and the report shows cooperation among banks to fix the rate. Hayes was fired from Citigroup for conspiring to fix TIBOR, the Tokyo Interbank Offered Rate. In December, he was arrested and charged with wire fraud and price fixing.

Most damning of the 54-page report are the logs of chats and emails discussing the rate manipulation: where the rate should be, requests to raise or lower it, and offers of lunch for the trader's desk to fix it at a certain rate. Even after traders learned of an investigation into LIBOR rigging, the rate fixing continued.

The untouchable U.S.?
Three U.S. banks are involved in setting LIBOR -- JPMorgan Chase, Bank of America, and Citigroup -- but to date haven't faced charges. The report issued by the CFTC on RBS showed significant involvement by Citigroup into the rate-rigging scandal, and that the implication of the U.S. banks could be traced back to employees who began at Royal Bank of Scotland.

The Foolish bottom line
With 16 banks involved in setting LIBOR, three of which are based in the U.S., the investigations, fines, and any subsequent adjustments to the rate-setting process could span several years. But don't expect them to have any long-term effect; the fines are minor compared to the profits of these major banks and will barely register on their bottom lines.

Molly McCluskey owns shares of the Royal Bank of Scotland. The Motley Fool owns shares of Bank of America, Citigroup, and JPMorgan Chase. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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