By Dominic Elliott
LONDON, Dec 19 (Reuters Breakingviews) - The $1.5 billion
settlement UBS has agreed to pay for rigging the London
Interbank Offered Rate is unlikely to end the Swiss bank's
reputational or financial woes. The litany of compliance errors
it made over a five-year period paves the way for litigation
from other market participants. And clients may also balk at
using the bank for Libor business in future, putting UBS's new
strategy for a reduced investment bank under pressure.
UBS can absorb the immediate pain. The total 1.4 billion
Swiss franc in penalties amounts to the group's pre-tax profit
in the third quarter, about a third of last year's net profit.
UBS used the settlement as an opportunity to issue a profit
warning for the fourth quarter. But the expected 2 to 2.5
billion Swiss franc loss, which relates to the fine as well as
restructuring and accounting charges, has already been baked
into the share price.
UBS's long-term future looks less certain. The UK's
Financial Services Authority's settlement notice raises the
prospect of future litigation, with a reference to the "serious
harm" the bank's misconduct could have done to other market
participants. UBS's Chief Executive Sergio Ermotti acknowledges
as much: he has said the impact on clients is far from
understood. In part, this is because Libor is an industry issue
and only Barclays and UBS have so far settled with authorities.
As many as 10 rivals could follow.
Libor is used to set trillions of dollars of contracts
worldwide: it's a business no serious bank can afford to pull.
But serious questions remain about the culture of a banking
group that allowed such behaviour to thrive for so long. The
wrongdoing was also widespread: as many as 47 UBS bankers were
involved, directly or indirectly, in gaming Libor between 2005
and 2010. UBS may have done more than rivals to hack back the
riskier parts of investment banking, but its Libor rates
business remains largely intact. Well-intentioned pledges,
sincere as they may be, may not be enough to convince investors
that reputational risk has evaporated.
Ermotti and his management team have tried hard to convince
investors and regulators that the group has changed its spots.
But the UK regulator notes that UBS twice attempted to reform
its Libor-setting systems - and twice failed. Investors beware:
the leopard may live on.
CONTEXT NEWS
- UBS said on Dec. 19 that it agreed to pay about 1.4
billion Swiss francs in fines and disgorgement to United States,
UK and Swiss authorities to settle investigations into whether
it had rigged the London Interbank Offered Rate, which is used
to set terms for a wide range of financial contracts worldwide.
- As part of the agreement with the U.S. Department of
Justice, a Japanese unit of UBS pleaded guilty to one count of
wire fraud. The Swiss bank said it would continue operations in
the country.
- UBS also said it expected to suffer a loss of between 2
billion to 2.5 billion francs in the fourth quarter, chiefly as
a result of provisions for litigation and unspecified effects of
regulation.
- UBS Chief Executive Sergio Ermotti, in a memo to staff
seen by Breakingviews, said "we are far from having an
understanding ... how clients were affected."
(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own.)
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