Thursday, January 10, 2013

Former UBS bosses accused of 'staggering ignorance' over Libor rigging

The UK parliament's Banking Standards Commission accused the former bosses of UBS of 'ignorance... staggering to the point of incredulity' with respect to the rigging of Libor interest rates.

As reported by the Telegraph,
Swiss national Dr Rohner said he was "shocked" and "ashamed" when he read about the rigging of Libor interest rates but said during his period as chief executive he was trying to save the bank from collapse and was unaware of the misconduct. 
He and his colleagues denied knowledge of early alarm bells over Libor fixing at the bank, including a Wall Street Journal story in April 2008 and a Bloomberg report months earlier. 
The 48-year-old, who was group CEO for 20 tumultuous months between 2007 and 2009 when the bank suffered more than $50bn in mortgage write-downs, insisted ....
"I did not think it [the Libor rate] was having a big impact on the market at the time"
What happened after the MPs displayed their displeasure with this response was the critically important part of the session.

Sheepish silence from the former executives followed Mr Tyrie's closing remarks: "We've heard of appalling mistakes that can only be described as gross negligence and incompetence. 
"You were ignorant and out of your depth."...
To which the former UBS bosses
admitted they presided over a raft of shortcomings at UBS... 
[Dr Rohner] said the business had grown too complex to manage, saying "We embarked on things we were not fit for, it turned out," and admitted that some people hired by UBS in the past were "clearly mercenaries". 
Jerker Johansson, who was chief of the investment arm for just over a year from 2008, conceded management had been negligent not to detect the misconduct and under persistent questioning said Libor rigging was tantamount to stealing.
Please re-read the highlighted text again for the former bosses make a number of very important observations.

First, the business of UBS had grown too complex to manage.  This is true of all the other TBTF banks too.

One of the reasons that your humble blogger has been pushing for banks to be required to provide ultra transparency and disclose on an on-going basis their current global asset, liability and off-balance sheet exposure details is this transparency highlights the complexity of the banks.

When a bank is too complex to manage it also tends to be too complex to be understood by bank examiners or by market participants.  

Between bank management, bank examiners and market participants, only market participants are going to confess to not be able to assess what is going on.  The way market participants confess is by assuming that all the complexity creates risk and therefore they require a higher rate of return if they are to invest in the bank.

It is this higher cost of funds that enforces market discipline on the banks.  The higher cost of funds provides an incentive to the banks to reduce their complexity to a level where market participants can assess what is going on and reward the bank with a lower cost of funds.

Second, ultra transparency helps with the problem of mercenaries because sunlight is the best disinfectant.  Mercenaries quickly figure out that the culture of the bank is full disclosure and that any bad behavior will be exposed.

Third, ultra transparency prevents the banks from stealing through activities like manipulating interest rates.  Benchmark interest rates like Libor can be based off of all the actual trades.

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