BANKING

RBS managers condoned Libor manipulation during expansion

BLOOMBERG FILE PHOTO/CHRIS RATCLIFFE
A VISITOR ENTERS the headquarters of the Royal Bank of Scotland Group Plc in London. RBS managers condoned and participated in the manipulation of global interest rates, indicating that wrongdoing extended beyond the four traders the bank has fired.
Posted 9/25/12

LONDON - Royal Bank of Scotland Group Plc managers condoned and participated in the manipulation of global interest rates, indicating that wrongdoing extended beyond the four traders the bank has fired.

In an instant-message conversation in late 2007, Jezri Mohideen, then the bank’s head of yen products in Singapore, instructed colleagues in the U.K. to lower RBS’s submission to the London interbank offered rate that day, according to two people with knowledge of the discussion. No reason was given in the message as to why he wanted a lower bid. The rate-setter agreed, submitting the number Mohideen sought, the people said.

Mohideen wasn’t alone. RBS traders and their managers routinely sought to influence the firm’s Libor submissions between 2007 and 2010 to profit from derivatives bets, according to employees, regulators and lawyers interviewed by Bloomberg News. Traders also communicated with counterparts at other firms to discuss where rates should be set, one person said.

“This kind of activity was widespread in the industry,” said David Greene, a senior partner at law firm Edwin Coe LLP in London. “A lot of the traders didn’t consider this behavior to be wrong. They took it as the practice of the trade. This is how things operated, and it seemed harmless.”

Internal investigation

RBS, 81 percent owned by the British government, is one of at least a dozen banks being probed by regulators worldwide over allegations that traders colluded to manipulate the benchmark interest rate so they could profit from bets on interest-rate derivatives. Barclays Plc, Britain’s second-biggest bank, was fined 290 million pounds ($470 million) in June for rigging the rate, used for more than $300 trillion of securities ranging from mortgages to student loans. Chief Executive Officer Robert Diamond and Chairman Marcus Agius resigned in the aftermath.

Regulators are now probing RBS’s yen, Swiss franc and U.S. dollar sales-and-trading businesses, all part of the fixed- income division Fred Goodwin expanded before he was ousted as CEO in 2008, said two people who asked not to be identified because the bank’s internal investigation, begun more than two years ago, is still in progress. Investigators are focusing on the firm’s swaps, inflation-trading and foreign-exchange teams, as well as on money-market traders who made daily Libor submissions, the people said.

The rate-rigging allegations are the biggest blow to the Edinburgh-based lender since it took 45.5 billion pounds from taxpayers in the largest bank bailout in history and Stephen Hester replaced Goodwin. Analysts including Morgan Stanley’s Huw van Steenis estimate the scandal may cost RBS, the country’s third-biggest bank by assets, more than any U.K. competitor.

RBS fell as much as 1.8 percent and was down 1.2 percent at 268.20 pence as of 11:45 a.m. in London trading today.

Rate-setting

The process of setting rates was open to abuse because RBS failed to establish guidelines until June 2011, four people familiar with the business said. Managers encouraged rate- setters to discuss Libor with traders across the company as a way of ensuring the bank’s submissions reflected market conditions, particularly after money markets froze in 2007, the people said. These communications -- by e-mail, instant messages and telephone -- are the focus of regulators’ probes.

The bank’s seating arrangements helped facilitate these interactions. Money-market traders who made the firm’s daily Libor submissions sat on the same desk as derivatives traders whose profits rose and fell depending on where Libor was set, three people said. When the rate-setters were away, derivatives traders were asked by managers to make the submissions themselves, the people said.

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