UBS targeted in interest-rate rigging scandal

Swiss bank UBS is reportedly close to a $1 billion settlement with regulators over the LIBOR rate-rigging scandal.

There was word today that another very expensive shoe is about to drop over the rigging of a key interest-rate benchmark known as LIBOR. The London Interbank Offered Rate is used to set and adjust rates around the world, on everything from certain types of mortgages to big business loans.

According to the New York Times, Reuters and several other published reports, the Swiss bank UBS is likely to be fined somewhere near a billion dollars for its role in the scandal. That would be the biggest civil settlement in the case yet, although it remains a relatively small amount by global banking standards.

Authorities may be treading lightly to avoid pushing the big banks out of business. As securities law attorney Jacob Frenkel explains it, taking a bank to court could bring what amounts to a death penalty.

"By criminally prosecuting a bank, it can be prevented from participating in the financial system," says Frenkel, a former federal prosecutor. That, he says, "would, in essence, destroy the bank."

Frenkel says authorities seem to be focusing now on "the responsible individuals." He points to the first arrests in the rate-rigging probe, which were made this week by British police and anti-fraud officers. Frenkel says that opens a path to prosecution that's less destabilizing for the banks.

At the University of Delaware, professor Charles Elson contends that prosecuting people makes more sense than going after the institution. When a bank faces charges, it's the shareholders who will pay -- even though Elson says they didn't do anything wrong.

"It's kind of like saying, 'We're going to go after the getaway the car,' as opposed to the person robbing the bank and driving the car," says Elson.

The bank still bears some liability, however, if it encouraged the wrong corporate culture, argues Northwestern University accounting professor Thomas Lys. He questions whether the banks provided sufficient supervision, or possibly worse. "Maybe there was even inducement to kind of push the limits of what's acceptable," he suggests.

lf that's the case, Lys points out the banks involved might not be home free just yet. He expects a flood of civil lawsuits over, potentially, many billions of dollars in damages from people harmed by the rate-rigging.

About the author

Bob Moon is Marketplace’s senior business correspondent, based in Los Angeles.

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