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Sometimes UBS Traders Manipulated Libor Just To Mess With Each Other

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The last of the UBS Libor settlements to come out was the U.S. one and it has some of the best quotes. There's the yen swaps trader who said "I live and die by these libors, even dream about them." There's ... I mean, there is the life and career of Bart Chilton, in toto; here is a thing he said:

"A Conscience Isn't Nonsense"

Statement of Commissioner Bart Chilton on UBS Settlement

December 19, 2012

Every so often, folks wonder if some in the financial sector believe that having a business conscience is nonsense. Financial sector violations are hurtling toward us like a spaceship moving through the stars. All too often, penalties have been a simple cost of doing business. That needs to change.

Particularly good are the exhibits to the criminal complaint against Tom Hayes and Roger Darin. We've previously met Hayes, cleverly disguised as Trader A; he was the senior yen swaps trader at UBS in Tokyo. Darin was the short-term rates trader "in Singapore, Tokyo, and Zurich," though probably not all at once; he and his team submitted yen Libors for UBS. You can guess what happened when they got together!

But you don't have to guess because there are lots of transcripts of their chats in the exhibits.1 Here is a problematic one:

Here is a ... strange one:

There is much going on here, mostly outside of the bits that the prosecutors highlighted. First, of course, there is the dialogue of:

Hayes: Hi I'm Tom.
Guy: Hi Tom, nice to meet you.
Hayes: Would you mind committing a crime for me?
Guy: Oh sure no problem.

... which brings you back to the question, is this: (1) all of these people did not fully realize that they weren't supposed to be doing what they were doing, (2) UBS's culture was one of complete lawlessness and fuck-around-ery, or (3) both of those things are true and reinforce each other?

But second, what is this?

Guy: in terms of fixing we rather paid
Guy: (so personally go for high ones) at the moment
Hayes: great i am paid too, really need high 6m fixes till thursday
Guy: yep we on the case there
Guy: will def be on the high side
Hayes: thanks ever so much if you are the other way round in the next few days as i wd rather trade with you lower down and get a higher fix, i have about 500b 6m fixes from today till and including thursday
Guy: I come def back to you if I find myself short

I think that translates:

  • The cash desk was net getting paid Libor so wanted a high Libor.
  • Hayes on the swaps desk was also getting paid floating so wanted a high Libor.
  • Hayes added "oh, if you ever find yourself net paying Libor, come to me and I will lend you money for a below-Libor rate so you can submit a high Libor without consequence to your profits."

Isn't that sort of pleasing? I suppose that the cash desk was net receiving Libor because it was lending money in the interbank market; a higher fixing would I guess convince borrowers to pay more to borrow from UBS.2 Exercise for the reader: is that illegal Libor manipulation? Is trying to juice the rate actually paid by actual borrowers in the actual market that Libor is sort of supposed to represent ... is that what Libor is supposed to be? Or is that manipulation too? (If it's manipulation too, why isn't the cash desk making money for itself charged in any of these settlements?) But the prospect of the cash desk borrowing from the swaps desk is particularly mind-melting: while Barclays and UBS both have emails involving bribes of champagne and favor-trading, the bribe of "do something to damage your P&L and help mine, and I'll pay for it out of my P&L" is ... much more obvious, and also much more like regular old market manipulation.

But UBS's best Libor manipulation of all was quite unlike regular market manipulation as it is normally practiced. From the CFTC settlement:

As another example, on July 23, 2009, Submitter-1 caused UBS’s Euroyen TIBOR submissions to decrease for a different improper purpose. On that day, Submitter-1 had the Euroyen TIBOR submitter drop UBS’s 3-month TIBOR submission by 4 basis points simply to damage Trader-1’s positions, and not because that is where he perceived Yen cash was trading. [footnote:During this period, Trader-1 and Submitter-1 were rivals at UBS and had feelings of animosity towards one another.]

In an electronic chat with Trader-B at another Contributor Panel bank, Trader-1 explained how he would rectify the situation by manipulating TIBOR settings higher the following week:

[Submitter-1, who caused TIBOR to drop] hates me and is going to zurich . . . [his /her] last day is Friday . . . so [s /he] tried to screw my pos[ition] . . . next week we have control . . . so will try to get it back up . . . or rather will do it . . . monday goes back up

Assistant Attorney General Lanny Breuer said in announcing the charges, "Make no mistake: for UBS traders, the manipulation of LIBOR was about getting rich." And my reaction was, "of course it was, you annoying tautology; why would anyone manipulate any financial quantity for reasons other than making money?"

But I - and Breuer, I guess - hadn't realized that UBS was such a mess that it sometimes manipulated Libor to lose money. And we forgot about the other great motivator in trading and life. Mostly UBS traders manipulated Libor to make money. Sometimes, though, they manipulated Libor for revenge.

UBS Securities Japan Co. Ltd. to Plead Guilty to Felony Wire Fraud for Long-running Manipulation of LIBOR Benchmark Interest Rates [DOJ, with complaints etc.]
CFTC Orders UBS to Pay $700 Million Penalty to Settle Charges of Manipulation, Attempted Manipulation and False Reporting of LIBOR and Other Benchmark Interest Rates [CFTC, with order etc.]

1.Also other people's chats. Here's Hayes talking with a broker about bribing another broker:

2.Alternately/additionally, the cash desk seems to have traded short-term swaps, so they might have been manipulating Libor for their own derivatives book.