December 19, 2012 11:59 am

‘Lowball’ tenders aimed to paint rosy picture

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UBS attempted to manipulate Libor rates not only to benefit its trading book but also to paint a rosier picture of its financial health when credit markets dried up, the UK financial regulator alleged in documents accompanying its record fine of the Swiss bank.

Findings by the Financial Services Authority published on Wednesday detail two broad sorts of failings by UBS, as was the case with Barclays – the only other bank so far to have paid a fine to settle in the global probe into manipulation of key interbank borrowing rates.

Explainer: Libor Lexicon

Analysis BIG PAGE Libor pfeatures

Lowballing A term used to describe the practice of deliberately underestimating a price to deceive the market. In this case, UBS rate submitters were reporting artificially low benchmark interest rates to make the bank appear stronger during the financial crisis

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While traders tried to nudge rates up and down to benefit their trading books, during the financial crisis, senior management at UBS issued directives to “lowball” Libor submissions so that the bank did not attract negative media comment about its creditworthiness, according to management emails cited by the FSA.

“It is highly advisable to err on the low side with fixings for the time being to protect our franchise in these sensitive markets,” one UBS manager wrote to three superiors on the day that a Bloomberg article questioned banks’ dollar-denominated Libor submissions in August 2007.

Suspicions that banks were lowballing Libor submissions during 2008 – prompted by a Wall Street Journal article – spurred regulators into launching their probe, which has embroiled about 20 of the world’s biggest banks and inter-dealer brokers. It was only after lenders started investigating the allegations that the extent of traders’ attempts to benefit their trading books was uncovered.

In April 2008 – just one week after UBS announced subprime losses of $19bn and the departure of its chairman, Marcel Ospel, two UBS managers emailed to ask why their Libor submissions, at 2.71 per cent, were so far from the bank’s commercial paper issuance rate of 2.81 per cent.

“Here is a mind-f*** for you,” wrote the first manager in messages cited by the FSA. “If we are doing CP at 2.81 per cent and that is 3m USD Libor + 10, why aren’t we putting our 3m rate in at 2.81 per cent for libors?”

“We should,” was the response. The first manager continued: “But then [group treasury] will rip our boys a new one for being the highest bank in the poll.”

It was arguably Barclays’ lowballing – and complicity among management – that secured the departure of its chief executive, Bob Diamond, among others.

UBS’s executive team has been overhauled since the financial crisis.

At times, the aims of lowballing and profiteering conflicted. Messages from a UBS manager to his boss, cited by the FSA, reveal that his frustration that orders from UBS’s treasury department to lower Libor conflicted with his “concerns to maximise profits” through yen-denominated Libor manipulation.

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