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February 20, 2012, 7:23 PM EST
By Lindsay Fortado, Liam Vaughan and Joshua Gallu
Feb. 21 (Bloomberg) -- UBS AG’s decision to become first- confessor as regulators probe the alleged manipulation of interest rates will ratchet up the risks for other banks that set the benchmark for $360 trillion of securities worldwide.
UBS, already facing scrutiny of its internal controls after posting a $2.3 billion loss from unauthorized trading last year, is trying to shorten the probe against itself by cooperating. Its disclosure to regulators that employees colluded to rig the London interbank offered rate is likely to renew calls for regulators to overhaul the way firms set the rate.
“This is a quaint, insider club which is clearly not fit for the 21st century,” said Richard Werner, a finance professor at the University of Southampton, England. “There is no independent verification of the interest rates reported by the banks which is a big problem. This affects the whole economy: mortgages, derivatives contracts across the world.”
By making the first disclosure to regulators, the Zurich- based lender will make it harder for competitors including JPMorgan Chase & Co. and Citigroup Inc. to claim similar protection. UBS’s competitors could face higher penalties for not coming forward earlier, Francis said.
Brian Marchiony, a London-based JPMorgan spokesman, and Jeffrey French, a spokesman for Citigroup in London, declined to comment on the investigations.
The damages, if the probes establish liability, “could be enormous, depending on how they’re defined,” said Peter Henning, a law professor at Wayne State University in Detroit. “It will be a mess evaluating damages given all the derivatives contracts and swaps tied to these rates. This won’t be resolved anytime soon.”
Libor is derived from a survey of banks conducted daily for the British Bankers’ Association in London. The lenders are asked how much it would cost them to borrow from one another for 15 different periods, from overnight to one year, in currencies including dollars, euros, yen and Swiss francs. After a predetermined number of quotes are excluded, those left are averaged and published for each currency by the BBA before noon.
“Libor has always been a lie because it represents what banks would pay for funds rather than what they are actually paying,” said Peter Hahn, a finance professor at London’s Cass Business School and a former managing director at Citigroup. “People who have an incentive to make money from mispriced markets are able to misprice those markets, and that is a serious control problem.”
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