LONDON – Senior UBS executives faced tough questioning from British politicians on Wednesday over a recent rate-rigging scandal that led the Swiss banking giant to pay a combined $1.5 billion fine to global authorities.
During almost three hours of testimony, Andrea Orcel, head of UBS’s investment banking unit, and the firm’s chief risk and compliance officers were questioned over why the illegal activity, conducted over six years through 2010, was not discovered earlier.
“This scandal which took place at UBS was a shocker of enormous proportions,” said Andrew Tyrie, a politician who heads up the British Parliament’s commission on banking standards, which is investigating misconduct in the country’s financial services sector.
The multibillion-dollar fines were levied against the Swiss bank last month after American, British and Swiss regulators discovered that around 40 employees at the bank had actively manipulated key benchmark rates for financial gain.
During the recent financial crisis, senior managers at the Swiss bank also adjusted the firm’s interest rate submissions to portray the bank in a healthier financial position than it actually was, according to regulatory filings.
UBS’s Japanese subsidiary pleaded guilty to fraud related to the case, which included the manipulation of both the London interbank offered rate, or Libor, and Euro interbank offered rate, or Euribor. Combined, the rates underpin trillions of dollars of financial products worldwide, including sophisticated derivatives and home mortgages.
As part of the continuing case, the Justice Department has brought charges against two former UBS traders, Thomas Hayes and Roger Darin, for their roles in the illegal activity.
“These are industrywide problems,” said Mr. Orcel, a deal-making veteran who has advised on some of Europe’s biggest banking takeovers and who joined UBS last year from Bank of America. “We all got probably too arrogant, too self-convinced that things were correct the way they were. I think the industry needs to change.”
Mr. Orcel helped to broker the $97 billion acquisition of the Dutch bank ABN Amro in 2007 by a consortium of banks led by Royal Bank of Scotland. The mistimed deal played a role in R.B.S. being bailed out by the British government during the financial crisis.
The banker, who one British politician referred to as the “Ronaldo of investment banking” — a reference to the global Portuguese soccer start Cristiano Ronaldo – was asked whether he still would have supported the deal.
“Knowing what we know now,” Mr. Orcel said, “we would have advised them not to proceed.”
The British politicians peppered Mr. Orcel, UBS’s chief risk officer, Philip J. Lofts, and the firm’s global head of compliance, Andrew Williams, with questions about why the illegal activity was not discovered despite several internal audits of the bank’s trading activity.
The UBS officials acknowledged that only 18 of the 40 individuals linked to the rate-rigging scandal had been fired because of the illegal activity, though some of the implicated traders had subsequently moved to other banks before the misconduct was detected. Some employees connected to the illegal activity remained at the bank, the executives said.
The hearing also focused on the activities of Mr. Hayes, who worked at UBS from 2006 to 2009. The trader recorded around $260 million of profits during his time at the bank, though the UBS officials could not say how much of the earnings could be linked to ostensible manipulation of benchmark rates.
“His conduct was reprehensible,” Mr. Williams of UBS said on Wednesday. “We were all disgusted by it.”
When asked what steps the bank’s board had taken in the wake of the scandal, Mr. Williams said the Libor investigation had played a role in the firm’s decision to reduce its exposure to risky trading activity. Last year, the Swiss bank announced 10,000 job cuts, with a large percent of the layoffs expected in the firm’s investment bank.
“We are going to get out of much of the proprietary side of investment banking and go back to a client-focused model,” Mr. Williams told British politicians on Wednesday.
UBS is the latest global bank to be linked to the rate-manipulation scandal. Last year, the British firm Barclays agreed to pay a $450 million settlement with authorities after some of its traders were found to have altered Libor rate submissions for financial gain. Some of the bank’s senior executives, including the chief executive at the time, Robert E. Diamond Jr., resigned in the wake of the scandal.
More financial penalties are expected. The Royal Bank of Scotland has said it expects to announce an agreement with global authorities before it reports earnings in February, while Deutsche Bank of Germany has also said it had made financial provisions to cover potential fines.
Several American banks, including Citigroup and JPMorgan Chase, are also under investigation.
“This didn’t just involve traders at UBS,” Pat McFadden, a British politician said during the hearing on Wednesday. “This was a widespread practice in the banking industry. It was a serious corruption of the financial process.”
The $1.5 billion fine against UBS is the largest penalty levied so far in the five-year investigation into the manipulation of key benchmark rates, and was a new blow for the bank. Last year, UBS revealed a $2.3 billion loss related to illegal activity by a trader that led to the resignation of the firm’s former chief executive, Marcel Rohner. The bank agreed to pay a $47.5 million fine to British authorities for failing to detect the illegal trading.
UBS also agreed to pay American regulators $780 million in 2009 to settle allegations that it helped American clients evade taxes, while the bank also wrote down around $50 billion of sophisticated credit products during the financial crisis.
Mr. Rohner, several former chief executives of UBS’s investment banking unit, and senior officials from the Financial Services Authority, the British regulator, are to testify on Thursday in connection with the recent illegal activity at UBS.
DealBook: UBS Executives Questioned by Parliament in Wake of $1.5 Billion Fine
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DealBook: UBS Executives Questioned by Parliament in Wake of $1.5 Billion Fine
