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Wall Street rate rigging fines: Why was UBS singled out?

May 21, 2015, 2:44 PM UTC
The DOJ logo is pictured on a wall after a news conference in New York
The Department of Justice (DOJ) logo is pictured on a wall after a news conference to discuss alleged fraud by Russian Diplomats in New York December 5, 2013. REUTERS/Carlo Allegri (UNITED STATES - Tags: CRIME LAW) - RTX1657T
Photograph by Carlo Allegri — Reuters

The lesson, it seems, from Wednesday’s multi-billion dollar settlements with the Justice Department is that if you are going to fix a global financial market, you should do it with gusto. And, in a way, that makes for a good story, at least in a legal brief.

Five large banks agreed on Wednesday to pay the Department of Justice, the Federal Reserve, and the New York Department of Financial Services nearly $6 billion in combined fines. And that was on top of the fines that the banks paid back in the November. Matt Levine has helpfully added up the fines, and he has come up with a grand total of $10.3 billion for foreign exchange (FX) fixing. I know these are big banks, but that’s still a lot.

Four of the banks—Barclays, Citigroup (C), JPMorgan Chase (JPM), and Royal Bank of Scotland—pleaded guilty to anti-trust violations. A fifth bank, UBS, avoided pleading guilty to anti-trust violations and instead pleaded guilty to manipulating Libor, the London interbank rate, for which the bank had already been fined but given a suspended prosecution agreement, with the agreement that that would change if UBS broke the law again. Now that it has been found to have done that, UBS’s plea in the Libor case was changed to guilty.

Perhaps the oddest thing about the foreign exchange fixing settlements is how uniform they are. Four of the five settlement agreements say nearly exactly the same thing. The only thing that is slightly different is the time periods. But according to the settlements, the four banks did the exact same thing when ripping off their FX clients, word for word. And they did it in a pretty generic way. They spoke in code in chatrooms and only through a single designated trader at each firm. And they all withheld trades at certain times, if trading would have moved a price and cost another bank money. And they all participated in activity that, according to the Justice Department, “substantially affected interstate and U.S. import trade and commerce,” which seems like a little bit of a stretch.

But the way these global banks somehow substantially affected interstate and global commerce seems to be not all that interesting. Of the roughly 25 pages that make up the settlement agreements, just four paragraphs spend time describing what the banks actually did. Part of this is perhaps what you would expect in an anti-trust case. The point of an anti-trust case is that banks that were supposed to be competing were working together. So, some uniform behavior is to be expected.

But still you wouldn’t expect them to all be doing exactly the same thing. This is Wall Street. What you expect from traders is the collusion and then the double cross, or something like that. But the behavior the Justice Department found, or at least reported to have found, seems uniform.

Except in the case of UBS. According to the Justice Department, the UBS traders would tell clients there were no mark ups when there were ones. UBS would tell clients they executed trades at the market but instead had been able to sell them for more or buy for less. The firm would pocket the difference instead of passing along the better price to the client.

On other occasions, UBS traders would set up fake trading conversations in which clients would think they were listening in as their trade was going down. Instead, it was a ruse, staged in advance and quoting fake prices.

What is also interesting about the UBS settlement is that it appears that clients suspected wrongdoing. Why else would they have asked to be on the line to witness transactions if they didn’t suspect they were being ripped off? But even when they did listen in on the actual trades, UBS traders would hold up fingers to each other so that they silently knew they weren’t trading at the prices the clients heard but, depending on the fingers they held up that price, with some mark up instead.

The other banks apparently engaged in some of the mark ups and hand signaling as well. But UBS is the only one that the Justice Department has decided is worth exposing in full. UBS’s fine for all that FX fixing, and client deception, was $342 million. Citigroup, one of the banks that the Justice Department thought did pretty much the same boring stuff as everyone else, had to pay $925 million. JPMorgan’s fine to the Justice Department was $550 million, and it claims its bad behavior was the result of a single employee. (Although if hand signals were used to secretly set mark ups at JPMorgan, as the bank admits to, there had to have been at least two employees taking part, right?)

Part of this could be negotiations. Citi and JPMorgan may have agreed to a larger fine in return for the Justice Department agreeing not to reveal all of the embarrassing ways they ripped off their clients. But then why didn’t UBS do the same? And, after all the fines of the past few years, what client of a big bank is going to be surprised that they are being taken advantage of somehow? The banks’ clients were so concerned about being ripped off that they wanted to be able to hear their trades. And even then, they still didn’t.

Perhaps the behavior at UBS was so bad that the Justice Department couldn’t help itself but retell it. After so many fines, it’s nice to think that the Justice Department has gotten to the point where it is rewarding creativity.