Could gold be the next Libor scandal?

US regulator considering an inquiry into London's gold and silver markets to check if prices are open to manipulation

The fixing of the gold price in London dates back to
September 1919. Photograph: Grant Smith/Alamy

Simon Goodley The Guardian, Wednesday 13 March 2013 15.08 EDT

London's financial sector was last night bracing itself for another official investigation into alleged price-fixing following reports that a US regulator is considering launching an inquiry into the City's gold and silver markets.

The Commodity Futures Trading Commission is discussing whether the daily setting of gold and silver prices in London is open to manipulation, according to the Wall Street Journal, which stated that the CFTC is examining whether prices are derived sufficiently transparently.

The system of setting gold prices in London is unusual and involves a twice-daily teleconference involving five banks – Barclays, Deutsche Bank, HSBC, Bank of Nova Scotia and Société Générale – while silver is set by the latter three. The price fixings are then used to determine prices worldwide.

The news of the potential investigation comes after analysis of a similarly unusual system - the process used to determine the London interbank offered rate, known as Libor – uncovered manipulation and triggered multi-billion dollar fines against a group of banks.

Barclays was hit with a £290m fine last year, which resulted in the departure of its chief executive Bob Diamond and chairman Marcus Agius. Royal Bank of Scotland is paying fines of £390m for its role in Libor-rigging.

The fixing of the gold price in London dates back to September 1919, when the process involved NM Rothschild & Sons, Mocatta & Goldsmid, Samuel Montagu & Co, Pixley & Abell and Sharps & Wilkins.

At the start of each gold price-fixing, the chairman announces an opening price to the other four members who relay this price to their customers. Based on orders received from them, the banks declare themselves as buyers or sellers at that price.

Provided there are both buyers and sellers at that price, members are then asked to state the number of bars they wish to trade.

Spokespeople for all five banks involved did not comment when contacted last night.

If at the opening price there are only buyers or only sellers, or if the numbers of bars to be bought or sold does not balance, the price is moved and the same procedure is followed until a balance is achieved. The silver fix dates back to 1897.

Source:
http://www.guardian.co.uk/business/2013/mar/13/london-financial-sector-gold-market

LIBOR Scandal More Than Fraud - Whole Game Is Rigged

By Paul Jay, The Real News Network | Interview and Video 

 

Costas Lapavitsas: From multimillion dollar losses by cities like Baltimore to pension fund losses and much more, the LIBOR interest rate scandal shows that such mechanisms must be taken out of the hands of banks and be run in public interest.

TRANSCRIPT:

PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay in Baltimore. And welcome to this week's edition of The Lapavitsas Report on Economics with Costas Lapavitsas, who now joins us from London.

Costas is a professor of economics at the School of Oriental and African Studies at the University of London. He's a member of Research on Money and Finance, and he's a regular columnist for The Guardian newspaper.

Thanks, Costas.

COSTAS LAPAVITSAS, PROF. ECONOMICS, UNIV. OF LONDON: Pleasure to be here, Paul.

JAY: So what have you been working on this week?

LAPAVITSAS: I think one of the most interesting things to hit the news this week is the Libor manipulation case and the fine that has been imposed on the large British bank RBS for manipulating the Libor.

I think we need to talk a little bit about this so that people understand the significance of it, because it hasn't really been widely appreciated by the public.

Now, the Libor is not a real interest rate. It's a benchmark. It's a benchmark that is set privately by the banks and in secret. There's a committee of banks that does that. On the basis of the Libor, a whole host of other interest rates that are charged to people for their mortgages, to businesses, and so on are determined.

Now, the case and the fine imposed on RBS has discovered, has found that actually RBS has been colluding with brokers and others to manipulate the Libor. This is a criminal dimension. And they've been charged. The British government—.

JAY: Hang on one sec. Just for people that haven't followed this story at all, just a little more on why this matters so much.

LAPAVITSAS: This matters enormously for a number of reasons. As I said to you, as I said, this is not a real interest rate; this is a benchmark. If the banks determine the benchmark in an untruthful way, then they can influence a whole host of other prices, and they can influence the receipts they make from people to whom they've lent money and from the various transactions they make in the derivatives markets. For the banks, the ability to manipulate the Libor is a key mechanism to make extra profits, basically. And they've got this ability to do it because they set the Libor privately and in a special committee, which they run themselves.

Now, the British government is making out that this is a criminal act, which it is, of course, because collusion with the aim of making extra profits is criminal. The point is, however—and this is something that the British government wishes to keep quiet—it isn't simply criminality here. It looks as if the entire game is rigged from beginning to end. In other words, it isn't simply collusion and illegality. The game is rotten.

And it is rotten for two reasons, I would argue. First, the banks have got an incentive to present falsely low rates, because they in this way appear to be stronger than their competitors. And the banks have got an incentive to manipulate the rate sometimes up, sometimes down, because they make different payments in this way on their derivatives portfolio. The banks, then, have got clear incentives to manipulate it, and they signal their incentives to each other.

So this committee doesn't work. It doesn't work systematically in the public interest; it works in the interest of banks. This is becoming increasingly clear, and this is going to be big news, I think, in the months to come, because, of course, there are more banks that would be hit—that will be charged fines in the months ahead.

JAY: How did we get to a situation that a group of banks, most of them private, or maybe all of them privately owned, get to determine what is essentially the most influential rate in the globe? I mean, in theory, central banks are supposed to establish rates, I would have thought.

LAPAVITSAS: Central banks establish the rates at which they themselves lend to the banking system. However, there is also a private market for funds. There's the money market. And in the money market, banks interact with each other and work out the rate at which they lend to each other.
This is the most important price in the financial system. It's more important than the rate at which central banks lend to banks. It's the most important financial price. And presumably, in a neoliberal free-market system such as the one we've got today, it ought to be set through the free competition among the financial institutions. It isn't.

And that's the significance of this. This rate is actually manipulated. These banks have got a secretive committee. They work out the rate, which is the Libor. They don't transact at this rate—this is a benchmark. And they announce it on a daily basis. They manipulate it. They handle it. And by manipulate it, they affect all other actual interest rates at which people undertake [unintel.] transactions.

JAY: Now, just to make this concrete for people, a city like Baltimore claims it's lost millions of dollars that could have been spent on schools or roads or housing or whatever, and they've lost this money, they claim, because of this fraudulently set Libor rate. But how does that work? Why is Baltimore out money because of what some bankers are doing on this committee?

LAPAVITSAS: Because the prices Baltimore would have been charged on various loans it took or on derivatives transactions it engaged in—I don't really know the particulars of the Baltimore case, but the prices it would have been charged and the rates it would have been charged would have been false. They would have not have been true rates. They would have been based on the Libor, a premium would have been added to the Libor, and the Libor rate that would have been used as the base for this would have been a false, manipulated rate. And by manipulating it, the banks would have seen to it that money would have gone into their coffers, that their coffers would have gone up. It's a hidden, silent transfer of income and wealth from the public in general to the banks. It's arguably one of the biggest scams in the history of finance.

JAY: And Baltimore's leading a class action lawsuit of various cities, with Baltimore being the lead city, suing these banks to try to recover this money.

LAPAVITSAS: They're right to do so. As I said, I mean, there is obviously outright criminality in some respects, because these banks have been proven to have colluded with one another to handle—they manipulate the rate directly.

But the point I repeat is that criminality aside, it looks as if the entire game is rigged, that the banks actually can know how to handle and manipulate the rate without actually directly colluding with each other. And that's what's wrong about it, and that's what's bad about it, because it shows that the so-called free market in finance simply doesn't work.

I want to stress the importance of this. You see, neoliberalism and free markets, which is the mantra that we've been listening to and hearing for decades, pivots on the banks and the financial system. This is where it's supposed to be free. This is the markets, these are the markets, and the institutions are supposed to be as free as possible. Well, they're not. They're actually managing this rate, manipulating this rate in their own interests. And they are doing it through a private meeting.

You know, Adam Smith wrote more than two centuries ago that when you let capitalists meet in a nontransparent way on a regular basis, then they will do two things: they will defraud the public and they will raise prices. He argued that two centuries ago. Well, there you are. When you let banks meet on a daily basis, privately, without transparency, without public scrutiny, what they will do is to manipulate this key rate, the fundamental rate of the financial market, to make extra profits. That's what they've been doing.

This is one of the biggest scandals, as I said before, in the history of finance. It's about time the public realized what's happening and demanded intervention.

JAY: Alright. Thanks for joining us, Costas.

LAPAVITSAS: Thank you.

JAY: And thank you for joining us on The Real News Network.

Hong Kong joins UBS Libor rigging probe as US charges two ex-traders at bank with conspiracy to manipulate rate

Hong Kong is to investigate possible Libor rigging by UBS, a day after the Swiss bank agreed to pay £940m to regulators for trying to manipulate the key rate on an "epic scale" and two former traders at the bank were charged with conspiracy. 

By Telegraph Staff, and agencies

7:40AM GMT 20 Dec 2012

The Hong Kong Monetary Authority, the city's de facto central bank, said it has received information from overseas regulators about "possible misconduct" by UBS involving submissions for the city's interbank rate, known as Hibor, and other reference rates in Asia.

UBS was fined by Swiss, British and US regulators on Wednesday after an investigation revealed evidence of massive misconduct in the setting of the London interbank offered rate (Libor), a global reference that affects trillions of dollars of loans and mortgages.

The penalty is the second-largest banking fine ever.

The Hong Kong Monetary Authority said it had "commenced an investigation to assess whether the potential misconduct had any material impact on Hibor, which is considered a key benchmark interest rate for economies in the region.

It will work with overseas regulators to gather information and "consider further actions that need to be taken" pending the findings of the investigation.

Tom Alexander William Hayes, 33-year-old British former Tokyo-based trader, and Roger Darin, a Switzerland-based managing director responsible for the bank’s Libor submissions, were both charged with conspiracy, the US Justice Department said.

They are the first to face criminal charges in the investigation into Libor manipulation by global regulators.




Mr Hayes was also charged with wire fraud and a "price-fixing violation arising from his collusive activity with another bank to manipulate Libor".

He was one of three men arrested last week by the Serious Fraud Office in connection with its own investigation into Libor-rigging.

Mr Hayes, was described by the US investigators as one of UBS’s most successful yen derivatives traders and was said to have generated profits for the bank in the three years before he left in September 2009 of $236m. The size of his profits meant the banker could have earned anything up to $20m over the period based on the way banks pay their top traders.

UBS's fine is more than three times the £290m fine levied on Barclays in June for attempting to rig the Libor benchmark rate used to price financial contracts around the world.

It includes a £160m payment to the Financial Services Authority, the largest penalty ever levied by the British watchdog, $1.2bn paid to US authorities and a 59m Swiss franc 'disgorgement of profits' order from the Swiss.

As part of the settlement, UBS' Japanese arm has agreed to enter a plea to one count of wire fraud relating to the manipulation of certain benchmark interest rates, including yen Libor.

The steep fine for UBS is despite the bank, since 2011, co-operating with law-enforcement agencies in their probes. The bank said it received conditional immunity from some regulators.

In a statement on Wednesday, UBS said that certain personnel had "engaged in efforts to manipulate submissions for certain benchmark rates to benefit trading positions".

"Certain employees at the bank colluded with employees at other banks and cash brokers to influence certain benchmark rates to benefit their trading positions," UBS added.

The bank said that this conduct related to seven benchmark interest rates, although the nature and extent of the behaviour in question varied significantly from one currency to another.

UBS chief executive Sergio Ermotti said: “During the course of these investigations, we discovered behaviour of certain employees that is unacceptable. Their misconduct does not reflect the values of UBS nor the high ethical standards to which we hold every employee."

"We have co-operated fully with the authorities and taken decisive and appropriate actions to correct the issues and to strengthen our control processes and procedures," he added.

"We deeply regret this inappropriate and unethical behaviour. No amount of profit is more important than the reputation of this firm, and we are committed to doing business with integrity.”

The FSA said at least 45 people were involved in or were aware of the rigging and that the breaches occurred over a five-year period between January 2005 and December 2010.

The watchdog described the misconduct as "extensive and widespread", with at least 2,000 requests for inappropriate submissions documented and "unquantifiable" number of oral requests.

In its final notice to UBS, the FSA details some of the interactions, saying that "in the course of one campaign of manipulation", a UBS trader agreed with his counterpart that he would attempt to manipulate UBS' submissions in "small drops" in order to avoid arousing suspicion.

The FSA added that the "total disregard for proper standards by these traders and brokers" is clear from documented communications in which they referred to each other in "congratulatory and exhortatory terms" such as "the three muscateers [sic]", "superman" and "be a hero today".

In one example, the FSA quotes a UBS trader saying: “if you keep 6s [the six-month yen Libor rate] unchanged today ... I will [expletive] do one humongous deal with you ... Like a 50,000 buck deal, whatever ... I need you to keep it as low as possible ... if you do that ... I’ll pay you, you know, 50,000 dollars, 100,000 dollars ... whatever you want ... I’m a man of my word.”

Its final notice also revealed that UBS made "corrupt payments" of £15,000 per quarter to brokers to reward them for helping the Swiss bank manipulate interest rates.

Tracey McDermott, FSA director of enforcement and financial crime, said: “The findings we have set out in our notice today do not make for pretty reading."

"The integrity of benchmarks such as Libor and Euribor are of fundamental importance to both UK and international financial markets. UBS traders and managers ignored this," she added.

"They manipulated UBS’s submissions in order to benefit their own positions and to protect UBS’s reputation, showing a total disregard for the millions of market participants around the world who were also affected by Libor and Euribor. "

UBS Said to Face $1.6 Billion Libor Penalty This Week

UBS AG (UBSN) is set to pay as much as $1.6 billion to settle claims of Libor manipulation by the U.S. Justice Department, the Commodity Futures Trading Commission, the U.K. Financial Services Authority and the Swiss Financial Market Supervisory Authority, said a person familiar with the probes. 

By Lindsay Fortado and Greg Farrell on December 16, 2012

 

The announcement could come by tomorrow, said the person, who asked not to be identified because they aren’t authorized to speak publicly about the matter. The $1.6 billion figure would be more than three times the 290 million pounds ($469 million) that Barclays Plc (BARC) agreed to pay last June to settle allegations that its employees conspired to manipulate the London interbank offered rate, which is used in bank borrowing.

As part of the case, U.S. prosecutors are planning to file charges against multiple bankers associated with UBS’s rigging of Tokyo interbank lending rates, according to another person with knowledge of the matter. The charges would be the first brought by the Department of Justice against individuals alleged to have manipulated Libor and comparable lending rates in Europe and Japan.

The prosecution is slated to begin in tandem with an announcement that UBS Securities Japan Ltd., the Japanese unit of the Zurich-based bank, would plead guilty to manipulating Japanese interest rates starting in 2007, said the person, who asked not to be named because the matter is private.

No Comment

Christoph Meier, a Zurich-based spokesman for UBS, Liam Parker, a spokesman for the FSA, and Tobias Lux, a spokesman for the Swiss financial markets regulator, declined to comment on the settlement amount.

Karina Byrne, a spokeswoman for UBS, said last week in an e-mail: “We continue to work closely with various regulatory authorities to resolve issues relating to the setting of certain global benchmark interest rates. As we are in active discussions with these authorities, we cannot comment further.”
Unlike the pending settlement with UBS, the Justice Department didn’t require Barclays to enter a guilty plea to a specific charge. In deciding against a charge last June, prosecutors praised Barclays’ “timely, voluntary and complete disclosure of facts.”

UBS has been “granted conditional leniency or conditional immunity” by the Justice Department’s antitrust division, in connection with potential antitrust violations related to submissions for interbank lending rates in Tokyo, according to the Swiss bank’s most recent annual report.

U.S. Guidelines

According to Justice Department guidelines, a corporation can secure favorable treatment from prosecutors if it’s the first to pledge full cooperation in an antitrust investigation. In order to win that leniency, however, the corporation has to include an admission that it was part of an antitrust conspiracy, and help identify other participants in the scheme.

One year ago, Japanese regulators sanctioned UBS’s Japanese operations, curtailing the bank’s ability to participate in the Tokyo interbank derivative market for a week, and ordering the bank to improve its regime of compliance and internal controls.

Last week, a former Citigroup Inc. trader was among three people detained in the first U.K. arrests as part of the global Libor probes, according to two people familiar with the matter.

Thomas Hayes, a former trader at UBS and Citigroup, was arrested by the Serious Fraud Office and City of London Police, said the people, who asked not to be identified citing the continuing investigation.

The other two men arrested worked at brokerage firm RP Martin Holdings Ltd., according to one of the people and a third person familiar with the investigation, who also requested anonymity. The employees are Terry Farr and Jim Gilmour, people with knowledge of the investigation said. They were later released on bail.

To contact the reporters on this story: Lindsay Fortado in London at lfortado@bloomberg.net; Greg Farrell in New York at gregfarrell@bloomberg.net.

To contact the editors responsible for this story: Anthony Aarons at aaarons@bloomberg.net; Michael Hytha at mhytha@bloomberg.net.