The Royal Bank of Scotland’s world of pain

By Ian Fraser

Published: July 15th, 2012

Published: Sunday Herald

In his glory days Fred Goodwin aspired to make Royal Bank of Scotland a global bank on which the sun never set. Corporate videos extolling the group’s global reach were routinely played at investor meetings. His legacy is a world of trouble, with the bank deeply implicated in Libor rate rigging scandal, in which scores of the world’s largest banks are alleged to have conspired to manipulate the price of money to deflect concerns about their health and bolster profits.

Analysts at Morgan Stanley last week said RBS would be one of the hardest hit, estimating that it faces $1.06 billion in legal costs alone. Libor, which stands for London Interbank Offered Rate, is a benchmark rate used to price some $800 trillion of financial instruments including loans, deposits, investments and derivatives (including swaps and options). The rate is compiled through a remarkably casual daily survey of banks, which are asked how much it would cost them to borrow from other banks over 15 time periods, from overnight to one year, and in a range of currencies including dollars, euro, yen and Swiss francs.

But it’s looking increasingly likely that, in 2005-11, RBS and about 20 others banks were routinely faking the numbers in what is almost certainly the biggest fraud in history. Robert Shapiro, chairman of US-based economic consultancy Sonecon and a former Under Secretary of Commerce in the Clinton administration, said:

“Libor hearkens back to a time when finance operated like a gentlemen’s club, and its leading members behaved honestly. That is a universe away from the current Wall Street culture and behaviour … We now know that when they bet on rates rising or falling [banks] stacked the Libor deck to nudge rates in the direction that made money. And they left everybody else with the bill.”

RBS is being investigated for alleged Libor rigging by the Department of Justice, Federal Bureau of Investigation and the Commodities Futures Trading Commission. In a sign of the investigation’s growing seriousness, Anne Termine, lead enforcement attorney at Washington based CFTC is working on the probe full-time. The government of President Barack Obama has confirmed this is not just a civil probe but also a criminal one. Last week a group of US lawmakers pressed the authorities to pursue criminal charges against banks and individuals involved.

“Much more needs to be done,” the senators wrote. “Banks and their employees found to have broken the law should face appropriate criminal prosecution and civil action.”

RBS is expected to face higher penalties than the $451m (£290m) imposed on Barclays and could also face massive damages claims following a rash of civil suits and class actions from investors, savers and borrowers who claim to have lost billions as a result of alleged market rigging. Already, cities and states have started suing RBS and other large banks. Analyst Sandy Chen said that, assuming there was just 0.05% mispricing in interbank rates over four years – much less than the 0.4% that some class action lawsuits allege – RBS could face damages of £80bn.  RBS says it is cooperating with investigators who had requested information, and that it has substantial defences to civil claims.

RBS is also one of 17 banks being sued by the Federal Housing Finance Agency (FHFA) over $30.4bn of subprime bonds the bank the government-owned mortgage lenders Fannie Mae and Freddie Mac during the credit bubble years. The FHFA alleges that, under former chief executive Fred Goodwin, RBS misrepresented or failed to conduct adequate checks on home loans before bundling these into securities. However, in a separate robe, RBS was told by the SEC in March that the agency had completed its investigation of its valuations of CDOs and didn’t intend to recommend any enforcement action.

In Canada, RBS is fighting demands from law enforcement agency the Canadian Competition Bureau, to hand over documents including email and phone records which allegedly detail attempts by its staff to manipulate Libor and other interbank lending rates. The Edinburgh-based bank is one of several banks being probed for the alleged Libor rigging by the CCB, but is reportedly the only one that is refusing to provide necessary evidence.

The Canadian antitrust case is focused on six banks – the others are HSBC, Citigroup, Deutsche Bank, JP Morgan and UBS – which allegedly sought to rig the Yen Libor rate in 2007 to March 11, 2010. The court papers suggest the banks conspired to fiddle Yen Libor “to enhance unreasonably the price of interest-rate derivatives…” Traders involved earlier told Bloomberg that the existence of correspondence suggesting a conspiracy to rig rate shows they were not seeking to hide their activities from their superiors. They have claimed they did not know they were breaking the law.

Last weekend business secretary Vince Cable told BBC Radio 4‘s The World This Weekened: “If there is an official, legal enquiry in Canada and RBS are a party to it, then obviously they must cooperate. I would have thought it was a bit of a no brainer.”

On July 3 the Crown Office confirmed that it is conducting an investigation into the Scottish banking sector, although RBS was not named. A former procurator fiscal said he believes the probe is serious. “They wouldn’t have announced it if it was not serious”. He added that fraud is easier to prosecute in Scotland than in England since it is only necessary to prove a “false pretence” and “an intention to achieve a practical result”. The Crown Office said the probe, conducted by its Serious & Organised Crime Division, would culminate in a report for the procurator fiscal, who would then decide whether to press charges.

UK (excl. Scotland)
The Libor scandal erupted when Barclays reached a settlement with the UK and US regulators (Financial Services Authority, CFTC and Justice Department) on June 27, agreeing to pay total fines of $451 million (£290m).

Barclays thought coming out early would reduce the reputational harm but ended up facing a media and political firestorm amid questions that regulators including the Bank of England had turned a blind eye to rate rigging over a period of five years.

In the end the bank’s chairman Marcus Agius, chief executive Bob Diamond and chief operating officer Jerry Del Messier all resigned as a result of the scandal (though Agius returned on an interim basis to avoid Barclays being left rudderless).

Analysts expect RBS to face an even heavier fine than Barclays once the FSA concludes its probe, which the regulator’s chairman Lord Turner has said should happen by December at the latest. The reputational harm is also likely to be intense, with some investors concerned that RBS chairman Sir Philip Hampton and chief executive Stephen Hester may struggle to retain their jobs.

RBS senior executives and former senior executives, possibly including the bank’s former head of investment banking Johnny Cameron and former chief executive Fred Goodwin may  face criminal proceedings in England and Wales over the alleged rate-rigging.

David Green, director of the Serious Fraud Office, said on July 6 that he had decided to “accept the Libor matter for investigation”. However some lawyers believe that prosecutions may prove difficult. Richard East, a lawyer with London office of US law firm Quinn Emanuel Urquhart & Sullivan told Bloomberg the SFO is “very brave” to pursue a criminal probe.

“It’ll cost them a huge amount of money. They’ll obviously score direct hits with the particular traders, but will they catch the big fish? I don’t think so.”

RBS also faces civil action from the RBOS Shareholders’ Action Group in a circa £3bn to £4bn claim for damages from investors who allege the bank misled them into supporting a £12bn ‘rights issue’ a few months before its 2008 collapse.

The bank also faces having to pay substantial compensation to SMEs to which it missold interest-rate swaps, and the compensation bill for this is expected to rise as a result of the alleged fiddling of the Libor numbers. In a statement last month RBS said: “We are committed to the fair and timely treatment of our customers and will work closely with the FSA to achieve that end.”

Allegations of “systemic institutionalised fraud” within the bank’s distressed assets division, Global Restructuring Group, are also bubbling beneath the surface.

On October 18, 2011, RBS’s London offices were raided as part of a European Commission probe into anti-competitive practices in banking, including the rigging of Libor and other alleged market abuses.

On Friday EU competition commissioner Joaquin Almunia told a conference in Lisbon: “The alleged rate-rigging is a major competition concern. This is why we started investigating a number of banks last year for their possible concerted manipulation of benchmarks such as Libor, Euribor and Tibor, the Tokyo rate, for several currencies. The investigations have top priority because this sort of collusion can seriously harm competition worldwide and on our continent in particular.”

If banks did collude, Almunia wants to ensure the penalties are sufficiently severe to prompt “a change in culture”. Under EU law, investigators must only prove that there was an attempt to form a cartel, rather than prove its exact effect on the market.

EU internal market commissioner Michel Barnier last week confirmed he wants to introduce new rules that would criminalize the manipulation of benchmarks such as Libor. A spokesman for Barnier said: “We need to draw lessons from the Libor case.” RBS has confirmed it is being investigated by the EC.

RBS is one of 12 banks that are being probed by the Swiss Federal Competition Commission (Comco) for alleged manipulation of Libor and Tibor, the Tokyo inter-bank offered rate. Comco launched its investigation in February following an “application for leniency” by Zurich-based UBS after receiving information about possible collusion to rig rates. Comco vice director Olivier Schaller said the probe may take a further two years to complete.

He told Reuters: “The investigation in Switzerland is still in progress, the difference between this and the UK investigation is that the FSA is not a competition authority but a regulator … We have to deal with all the banks involved simultaneously rather than focusing the investigation on one bank at a time.”

Other banks being investigated by Comco include Citigroup, Credit Suisse, Deutsche Bank, HSBC, JP Morgan, Mizuho Financial, Rabobank, Societe Generale, Sumitomo Mitsui Banking Corporation and UBS.

In court papers filed with the Singapore High Court earlier this year, Tan Chi Min, RBS’s ex-head of interest-rate trading for the yen, declared that Libor rigging was common practice at the bank in 2006-11. Tan, who insiders claim was RBS investment bank’s highest earner in the region in 2009, is suing RBS for wrongful dismissal after the bank fired him for allegedly exerting improper influence over the bank’s Libor rate setters.

Tan claims the bank condoned the activity saying: “The defendant’s [RBS] consequent internal investigations were intended to create the impression that such conduct was the conduct not of the defendant itself, but the conduct of specific employees”. Also known as “Jimmy” Tan, he claims that, RBS sought to make him a “scapegoat” when it sacked him last November, and that the practice “was known to other members of [RBS]’s senior management” based in London and that its senior managers “condoned collusion”.

Discussions on rate inputs were held via electronic messages, telephone calls and regular meetings in RBS’s offices in Singapore, Tokyo and London, Tan said.  Tan, who worked for RBS from August 2006 to November 2011, is claiming almost £1 million in bonuses and 3.3 million RBS shares.

RBS was one of three banks that last week walked out of talks over a consensual restructuring of Dubai Group’s $10 billion debt pile and according to Reuters at least one of the banks involved is mulling legal action against the vehicle of the Gulf emirate’s ruling al-Maktoum family in order to push it into insolvency. RBS, Germany’s Commerzbank and South Africa’s Standard Bank were among the banks that had spent 18 months in talks with government-owned Dubai Group about the debt restructuring agreement and RBS had been co-chairing the coordinating committee of mostly unsecured lenders in the talks.

The Australian law firm Slater & Gordon last week confirmed it is working on a class action against banks implicated in the Libor rate-rigging scandal, likely to include RBS. Van Moulis, a commercial partner at Slater & Gordon, said that sophisticated investors and Australian corporates with syndicated loans ought to be in a position to claim for losses on investments that are linked to Libor. He said Slater & Gordon is monitoring the results of the various regulatory probes round the world before it launches the action. “It will be some months before we complete the due diligence process,” Moulis said.

In December, Japan’s Securities and Exchange Surveillance Commission said it would penalise the Japan securities arms of Citigroup and UBS after finding that an individual who worked at UBS and moved to Citi sought to manipulate Tibor, the Tokyo benchmark. The regulator said an employee known as “Trader B” had begun targeting Citi staff who submitted quotes from December 2009, repeatedly asking them to fiddle Yen Libor numbers. By April 2010, an executive known as “Director A” had been “hassling Citi employees who submitted the bank’s quotes for Tibor, to fiddle numbers, according to the SESC. It remains unclear whether the SESC’s Tibor probe encompasses RBS.

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