This issue of the Credit Crunch Digest focuses on a potential imminent regulatory settlement involving Royal Bank of Scotland’s role in alleged Libor manipulation; the profits obtained by Deutsche Bank for its investments in rigged Libor rates; the inception of criminal charges against traders involved in the manipulation of Libor rates; multiple settlements by Bank of America over its mortgage practices; the AIG shareholder suit against the government; Goldman Sachs’ effort to recover costs and fees expended in defending a board member found guilty of insider trading; delays in implanting aspects of Dodd-Frank; and a bill being proposed to merge the SEC and CFTC. 

Libor Scandal & Other Financial Institution Liability Matters

Two Former UBS Traders Charged by U.S. Government for Involvement in Libor Scandal

Fraud and Ponzi Schemes

Government and Regulatory Intervention

Libor Scandal & Other Financial Institution Liability Matters

Royal Bank of Scotland Libor Regulatory Settlement Reportedly Imminent

Royal Bank of Scotland plc (RBS) is drawing closer to being the third bank to settle Libor-related claims by various regulators.  Barclays PLC settled with regulators for approximately $450 million in June 2012, and UBS settled with regulators for approximately $1.5 billion in December 2012.  According to reports, the RBS regulatory settlement could be in the range of $800 million.  Further, it has been reported that the U.S. Department is Justice is pushing for one of RBS’ units to plead guilty to improper Libor manipulation.  RBS previously warned investors about its role in the improper Libor manipulation scandal last year.  (“US Pushing for RBS To Enter Libor Guilty Plea,” Law360, January 29, 2013)

Deutsche Bank’s Bets on Rigged Libor Rates Brings in More Than $650 Million in Profits

Regulators for U.S. and British authorities are continuing their investigations into more than a dozen international banks that allegedly colluded to artificially manipulate Libor interest rates for purposes of increasing profits.  Those investigations have uncovered that one of those lenders, Deutsche Bank AG, made more than $650 million in profits as a result of its trading positions on the rate. 

A former employee of the German bank has provided regulators with documents that confirm these trading profits and demonstrate how the banks would make a series of trades with the goal of realizing a profit based upon slight movement in global lending rates.  In addition to producing the documents, the former employee provided testimony that demonstrated the concerns of other Deutsche Bank employees regarding the risks being assumed by the interest rate bets.  However, according to the former employee, the bank was unfazed by these concerns because it knew that the rates were being rigged, thereby reducing the associated risks.

Deutsche Bank has characterized these allegations as “categorically false,” and pointed to its own internal investigation, which limits the misconduct to just a few rogue employees.  Deutsche Bank has cooperated with investigators and has sought to delay any settlement until after the bank completes its investigation.  Furthermore, Deutsche Bank has stated that it is confident that none of its senior executives were involved with the Libor-rigging scandal. (“Bank Made Huge Bet, and Profit, on Libor,” WSJ, January 9, 2013)

Two Former UBS Traders Charged by U.S. Government for Involvement in Libor Scandal

The U.S. Justice Department has formally filed charges against two former UBS AG traders for their involvement in manipulating Libor interest rates for the purpose of increasing profits for the bank.  The charges against Tom Alexander, William Hayes and Roger Darin come on the heels of a $1.5 billion settlement between UBS and the governments of the United States, the United Kingdom and Switzerland.  The UBS settlement follows Barclays PLC’s admission in June 2012 that it manipulated Libor rates in an effort to bolster a positive financial outlook during the global financial crisis. Barclays ultimately agreed to pay more than $450 million to settle all charges related to its involvement in the Libor scandal. 

Hayes and Darin will both face charges of conspiracy, and Hayes will also face charges of price fixing and wire fraud.  The U.S. government is currently seeking extradition of the men to face the charges, which include allegations that Hayes and Darin “conspired with others known and unknown within UBS to cause the bank to make false and misleading yen Libor submissions to the British Bankers’ Association.”

During their investigations, regulators discovered more than 2,000 instances where UBS had requested other banks and brokers to manipulate rates.  U.S. Assistant Attorney General Lanny Breuer stated that “for UBS traders, the manipulation of Libor was about getting rich.”  More than 45 bank employees, some in managerial positions, were aware of the widespread rate manipulation scheme, and more than 30 individuals have left the bank as a result of the investigation into wrongdoing.

UBS has indicated that it anticipates a fourth-quarter loss of between $2 billion and $2.5 billion Swiss francs as a result of its involvement in the rate-fixing scandal.  Furthermore, as part of its realignment plan, which will transition away from investment banking services to wealth management, UBS plans to fire 10,000 employees by 2015. (“UBS Libor Traders Face U.S. Criminal Charges,” Bloomberg, December 19, 2012)

Litigation and Regulatory Investigations

Bank of America Reaches Separate Settlements With Fannie Mae and Regulators

Bank of America (BofA) has reached several multibillion-dollar settlements arising out its mortgage and lending practices during the credit crisis.

On January 7, 2013, BofA announced an $11.6 billion settlement with Fannie Mae, the government-backed mortgage agency, to resolve claims that it sold Fannie Mae mortgages that did not meet the agency’s origination standards in the run-up to the housing crisis. As a part of the settlement, BofA will pay $3.6 billion in cash and will also repurchase approximately 30,000 loans, valued at $6.75 billion, that the bank and its Countrywide Financial unit sold to the agency from 2000 through 2008. BofA has also agreed to pay an additional $1.3 billion to Fannie Mae related to the bank’s foreclosure practices.

Also on January 7, BofA, along with a number of other banks and mortgage companies, announced an $8.5 billion settlement with federal regulators over wrongful foreclosure practices. The settlement addresses the banks’ foreclosure practices with respect to approximately 3.8 million foreclosed borrowers immediately following the housing crash in 2009 and 2010.  Only approximately 400,000 may be entitled to payments under the terms of the settlement. (“Bank of America reaches $11.6 billion settlement with Fannie Mae over soured mortgages,” Washington Post, January 7, 2013)

Facing Backlash, AIG Foregoes Joining Shareholder Suit Against Government

AIG’s board has unanimously decided against joining a shareholder suit against the United States led by Maurice Greenberg of Starr International Company and former chair and CEO of AIG.  The lawsuit, which stems from the $182 billion government bailout of the insurer at the height of the financial crisis, alleges that the government attached draconian terms to the deal harming AIG shareholders in the process.  The $25 billion lawsuit, which has been dismissed by the New York district court, is now on appeal to the Second Circuit Court of Appeals. A case before the Federal Claims Court in Washington remains pending. After the New York Times reported that AIG was considering joining the suit, the company faced significant public and government backlash. AIG recently repaid the entirety of the bailout, resulting in a $22 billion profit for the government. (“A.I.G. Says It Will Not Join Lawsuit Against Government,” NY Times Dealbook, January 9, 2013)

Fraud and Ponzi Schemes

Goldman Sachs Seeks Restitution From Former Board Member Convicted of Insider Trading

After spending close to $7 million in costs and $35 million in attorneys’ fees to unsuccessfully defend a director on its board accused of insider trading, Goldman Sachs has indicated that it intends to seek restitution of these advances.  The new charges arise out of the insider trading conviction of Rajat Gupta for sharing confidential bank financial information with a former friend who founded and operates a hedge fund. 

While Gupta is appealing his conviction, Goldman states that it was required to produce more than 400,000 documents to the government and prepare 18 witnesses for testimony in defending its former board member.  Under the bank’s bylaws, it hired the law firm of Sullivan & Cromwell to defend the criminal charges against Gupta. 

In support of its effort to recover these fees and costs, Goldman quoted the trial judge’s statements to the effect that “Goldman Sachs was the victim of Gupta’s crimes,” and that Gupta’s offenses constituted a breach of trust and duty of confidentiality to the bank.  Goldman may be successful in obtaining at least partial relief if past precedence is of any value.  In March 2012, Morgan Stanley was awarded more than $10 million of the $45 million it sought representing fees and costs advanced in defending a portfolio manager for a hedge fund that it owned.   In that matter, the judge reasoned that restitution was in order since the portfolio manager’s conduct had deprived Morgan Stanley of its employee’s service and valuable time, as well as resulting in damage to its reputation. (“Goldman Seeks $7M Legal Costs from Gupta,” Financial Times, January 4, 2013

Government and Regulatory Intervention

Frank, Capuano Propose to Merge SEC and CFTC

Rep. Barney Frank (D-Mass.), along with Rep. Mike Capuano (D-Mass.), introduced a bill last month, cited as the Markets and Trading Reorganization Act.  (Frank retired from his House of Representatives seat this month.) This bill proposes to merge the Securities and Exchange Commission and Commodity Futures Trading Commission to create the Securities and Derivatives Commission.  Frank said the current division “is the single largest structural defect in our regulatory system.”  The House of Representatives referred the bill to the Financial Services Committee and Agriculture Committee to determine whether it should require a full House vote.

Under the Markets and Trading Reorganization Act, the new commission would be comprised of five members nominated by the president and confirmed by the Senate.  Moreover, to limit partisanship, a maximum of three members can share the same political party.  All commissioners would have a five-year term limit.

The Securities and Derivatives Commission would include three divisions:  (1) Markets and Trading to oversee market conduct; (2) Issuers and Financial Disclosures to oversee issuing securities; and (3) Enforcement.  The commission would also be able to impress fees on commodity and future transactions to help fund the commission’s regulatory actions.   (“Reps. Barney Frank, Mike Capuano Introduce Bill to Merge SEC, CFTC,” BankCreditNews.com, December 3, 2012)

CFTC Delays Swap Regulations for Overseas Trades

The Commodity Futures Trading Commission (CFTC) voted to delay implementing controversial swap regulations for overseas trades until July 2013 in order to carefully determine when Dodd-Frank rules should apply or whether regulators may use international measures for overseas trading.  Dodd-Frank currently requires foreign-based banks and the overseas operations of U.S. banks to register any trades originating from the United States, including international ones.  Swap dealers now have additional time to modify their swap information while the deadline to comply with Dodd-Frank protocols has been extended.

In the interim, the CFTC will coordinate with other regulators, including international regulators, to help prevent fragmentation, duplication and conflict among all rules governing swap trades.  Until a decision is made in July, trades with non-U.S. clients will not count toward a bank’s calculation of their trading to determine whether they must report to the CFTC. (“Dodd-Frank Swap Rules Delayed Six Months for Overseas Trades,” Bloomberg, December 22, 2012)