Will This Fine Be a Heavy Blow to UBS?
For its part in rigging Libor interest rates, UBS (NYSE:UBS) will likely be fined $1.5 billion. While a settlement is not expected to be reached between the bank and U.S., British, and Swiss regulators before Wednesday, sources familiar with the deal told Reuters that the Swiss bank will admit that 36 of its traders manipulated the yen Libor between 2005 and 2010.
This will be the second-largest fine to be levied against a bank; HSBC (NYSE:HBC), which was penalized $1.92 billion for money-laundering last week, recorded the highest charge in history.
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How Much will this Admission Hurt UBS?
As Reuters reported on Monday the penalty, would have “only a limited financial impact on UBS,” as the bank earned $4.59 billion in net profit last year and has increased its capital levels throughout 2012 by eliminating risky assets. Even though the $1.5 billion is expected to cut 50 basis points of UBS’s capital ratios, Kepler Capital Markets analyst Dirk Becker has estimated that it will still be better capitalized than other banks after the fine, according to the publication.
But UBS’s Libor participation has other ramifications: political fallout. When Barclays (NYSE:BCS) reached a settlement with regulators, the deal “touched off a firestorm in Britain that forced its chairman and chief executive to quit,” Reuters said. However, UBS has already installed a new regime that is focused on its core business of wealth management rather than risky trading activities. The manipulation of the Libor benchmark, which is used to price trillions of dollars worth of loans worldwide, was part of those activities.
CHEAT SHEET Analysis: Does Honest Accounting Govern UBS’ Books?
One of the core components of our CHEAT SHEET Investing Framework requires companies to have zero evidence of accounting manipulation. In this case, regulators have determined that UBS, like Barclays, Royal Bank of Scotland (NYSE:RBS), and many other banks, considered its own trading position when reporting interest rates for the benchmark. Even a small shift in the benchmark rates, which are compiled daily from bankers’ reports, can benefit any given bank by millions of dollars, and that is why UBS is facing such a steep fine.
Not only will UBS be fined, but its Japanese unit will admit to criminal wrongdoing and individual traders will be charged, according to Reuters. Among those facing criminal proceedings is former UBS trader Thomas Hayes, who was arrested last week by London police and released on bail.
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