UBS Settles Libor Manipulation Charges At A Whopping $1.5 Billion

by Trefis Team
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Things just haven’t been going right for UBS (NYSE:UBS), with the largest Swiss bank having to deal with some of the largest financial and legal controversies in recent years. Still reeling under the effects of the $2.3 billion in losses from unauthorized trades by a single employee last year, and the estimated $350 million in losses from trading glitches during Facebook’s (NASDAQ:FB) troubled IPO this May, the bank has now been asked to fork out nearly CHF 1.4 billion ($1.5 billion) to settle the Libor manipulation charges leveled against it. [1]

UBS’s settlement amount makes Barclays (NYSE:BCS) look really lucky for being able to put the Libor issues aside at less than a third of this cost (see Barclays Paying $451 Million in LIBOR-Fixing Case, Who’s Next?). What remains to be seen is how much the other big banks embroiled in similar investigations shell out to put the Libor scandal to rest over the coming months.

We maintain a $15 price estimate for UBS, which is about 15% below current market prices.

See our complete analysis of UBS here

The Libor Scandal Runs Deep And Wide

The London Interbank Offered Rate (Libor) is arguably the most important benchmark rate used around the globe to fix interest rates for everything ranging from loans and mortgages to complex rate-based derivative contracts. The investigation of Barclays over alleged manipulation of the rates by its employees, opened the floodgates for more such action from regulatory bodies across the globe. Sixteen of the world’s biggest banks are currently being investigated for their role in trying to benefit from lower Libor rates reporting during the global economic crisis of 2008.

The Settlement Will Dent The Results For This Quarter

UBS will set aside CHF 1.4 billion ($1.5 billion) this quarter to pay £160 million ($260 million) in fines to the British Financial Security Authorities, CHF 59 million ($65 million) as disgorgement of estimated profits to the Swiss Financial Market Supervisory Authority and $1.2 billion in fines to the United States Department of Justice and commodity futures trading based on a payment schedule. [1] The $1.5 billion in charges will add to other mortgage-backed securities related settlements for the quarter as well as to the charges linked to the recently announced reorganization plan for UBS – leading to an estimated loss of CHF 2.0 to 2.5 billion ($2.2 to 2.7 billion) for the fourth quarter.

As most of the charges are associated with the bank’s investment banking operations, margins for the business as represented in the chart above will show a notable decline for the year.

Was Pleading Guilty The Right Way For UBS?

Ironically, UBS was the first among all the banks being investigated to actually admit wrongdoing to the regulators. And the magnitude of the settlement amount compared to Barclays makes you wonder if the Swiss bank would have been better off sticking to the “neither accepted the charges nor denied it” strategy while settling the issue. But then, the next inevitable question is how much more would UBS have been fined, if it did not admit to its fault in the first place?

The answer to that can also be expected once the investigations into other banks nears completion. RBS (NYSE:RBS) is expected to announce settlement details next, once it reaches an agreement with regulators over the next few days.

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Notes:
  1. UBS Board of Directors authorizes settlements of LIBOR-related claims with US and UK authorities; Swiss regulator to issue order, UBS Press Releases, Dec 19 2012 [] []
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