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Thursday, 31 October 2013

The Rabobank and Libor-gate: disgraceful fraud or storm in a teacup? And what will their customers notice from it?

The Dutch cooperative bank and second largest bank in The Netherlands, Rabobank, is one of the major banks that has been involved in the fraud with the LIBOR interest rate (London InterBank Offered Rate) and its ‘little sister’ Euribor (European InterBank Offered Rate). Other banks under suspicion have been Swiss bank UBS (Union Banque Suisse), the British banks RBS (Royal Bank of Scotland) and Barclays, and British brokerage company ICAP.

Unlike what you might expect in this age of globally interconnected computer networks, the Libor – and its European counterpart Euribor – are not based upon objective interest rate data, coming from a wide array of inter-bank loans and credit lines. Data, which could theoretically be retrieved from the computer systems of say… the top 500 of the largest banks in respectively the world and Europe.

No, instead ‘these rates are calculated from the results of a daily, oral inquiry among the banks, which are member of the eight Libor panels’ (source: Volkskrant):

The inquiry is held by the financial press agency ThomsonReuters. This agency asks every participating bank, against which interest rates it can borrow money from other banks in a number of different categories [f.i. on intraday, weekly, monthly or quarterly basis – EL]. Afterwards, the Libor (and Euribor) rate is calculated as an average of the interest rates mentioned by these banks and subsequently published by ThomsonReuters.

Already in 2008, the Bank of International Settlements (BIS) stated that this system was extremely vulnerable for fraud:  the participating banks can directly influence the Libor interest rate by not stating the true interest rates towards the poll-taker of ThomsonReuters, but using positively or negatively adjusted interest rates instead.

This might be in the interest of many banks, as these banks are trading with products, of which the price is directly derived from the Libor or Euribor interest rates in force. By pushing these interest rates a few notches in the ‘right’ direction (irrespective of this direction being higher or lower), these banks can earn more money on their financial products. The Rabobank is the only Dutch member of the Libor panels; the larger Euribor panel has also ING Bank as a member. As a consequence of the Libor scandal, the Rabobank abolished its membership from three of eight Libor panels. In the beginning of 2013, the bank also stepped out of the Euribor panel.

Summarizing, this fraud was possible due to the misplaced faith and confidence of dozens of national authorities, supervisors and banks:

  • in the honesty of a small group of leading banks and employees, who disgracefully abused this trust;
  • in a system, solely based upon subjective and manipulatable data. 
In spite of the warnings by the BIS, it took until June 2012 until ‘Libor-gate’ was discovered, due to a criminal investigation by the US Department of Justice and subsequent confessions made by Barclays bank.

These days, the results of the official investigation into Rabobank’s involvement in Libor-gate would be presented to the press and the outside world by the international supervisors and so it happened.

Last week, the Financial Times had already published rumours about the height of the penalty towards the Dutch Rabobank and yesterday these rumours were officially confirmed: the Rabobank received a massive penalty from the international authorities of €774 million, measured in dollars approximately $1.06 billion.

This mega-penalty was the result of the protracted  and relatively widespread involvement of the Rabobank in this fraud.

The following snippets come from the Financial Times:

Dutch lender Rabobank has paid more than $1bn to US, UK, and Dutch authorities to settle allegations that it manipulated Libor and other key benchmark rates, a scandal that has now claimed the bank’s chief executive.

On Tuesday, Rabobank said that 30 employees were involved in “inappropriate conduct”, and that its chief executive, Piet Moerland, would resign with “immediate effect”. Rinus Minderhoud, chairman of the bank’s supervisory board, will replace him on an interim basis, it said.

The total $1.06bn fine levied against Rabobank, a co-operative bank founded by farmers that traces its roots back to the 19th century, is far more severe than original estimates. It is the second-highest legal settlement in the sprawling Libor probe, after the $1.5bn paid by UBS in December.

The authorities found that about 30 Rabobank employees, including managers, had attempted to manipulate both Libor and Euribor, the Brussels equivalent, in four different currencies from 2005 to 2011 across locations including Tokyo, London, Utrecht and New York.

Five of the 30 employees have been sacked from the bank.

“For years, employees at Rabobank, often working with traders at other banks around the globe, illegally manipulated four different interest rates – Euribor and Libor for US dollar, yen, and Pound Sterling – in the hopes of fraudulently moving the market to generate profits for their traders at the expense of the bank’s counterparties,” said Mythili Raman, acting assistant attorney-general of the US Department of Justice criminal division.

Sipko Schat, head of Rabobank’s international wholesale clients division, told the Financial Times: “We really regret what has happened, it is disgraceful.” He said the bank had taken decisive action following its almost four year internal probe into the matter.

The DoJ did not file criminal charges against individuals as part of today’s global settlement with Rabobank.

And the Rabobank itself?! Did the bank show to the authorities that the bank was truly ashamed that something could happen within their ranks?! Well, not really.

And did it take decisive action after the bank discovered the fraud?! Pfff…

Yes, the CEO Piet Moerland of Rabobank did indeed resign yesterday; something which sounds like a crystal clear signal.
But wait… Moerland’s gesture was really not solely due to this Libor/Euribor case, as Piet Moerland’s reign of the Rabobank group can hardly be called a success of late:

·    Moerland is going through a huge series of conflicts with the (formerly independent) regional offices of the bank, which formed traditionally the heart of the cooperative Rabobank organization. The headoffice of the Rabobank tried to gain control the hard way, by forcing measures upon them and thus alienating these regional offices;

·    Moerland, as chairman of the Rabobank, has had conflicts with the Dutch national bank DNB and the Authority Financial Markets, concerning prudential supervision upon the local banks and especially their mortgage portfolios and the insufficient application by the Rabobank of the rules for customer integrity;

·    In the early months of 2013, Moerland has had a protracted conflict with his CFO Bert Bruggink, due to some unannounced changes in the board of directors;

·    And on top of that, both the commercial and residential real estate portfolios of the bank look horrendous, in the opinion of analyst Eric Smit of ‘Follow the Money’.

Besides that, Moerland was planning to retire next year anyway. With so many ‘dead bodies anywhere’, this resignation of Moerland is in fact a ‘token’ gesture by the bank and far from enough for cleansing and healing the bank from this dark passage in its history book.

Martin Visser, the distinguished and savvy commentator from De Financiële Telegraaf is remorseless in his fierce comments upon the bank (video fragment in Dutch):

It is an enormous and disgusting fraud. The thirty employees, who were responsible for the interest settlement, could go on for years and years, untouched by the executive management.

Systematically, they could make their mutual agreements: for six years and in hundreds of different cases. Managers have been involved. Even at the time when the US Authorities warned the Rabobank that they would start an investigation, the executives didn’t react at all. There was an utter undervaluation of this fraud case.

Sipko Schat, who was responsible for international business banking, just stayed put after the fraud had been discovered and is currently even the spokesman on behalf of the bank. In an earlier stage, he had stated that he saw the settlement of the interest ‘as nothing more than an administrative act without much meaning’.

This is already terrible. And to make things worse, only five of the thirty supposed ‘perpetrators’ (see red and bold text) have been sacked and this event took place WITH payment of a substantial dismissal fee. The other employees, the ones who were neither sacked, nor left voluntarily, are thus still working with the bank.

And none of the supposed perpetrators has received criminal charges yet from the Departments of Justice in the involved countries USA, UK and The Netherlands, or even had to pay back already received bonuses over the years 2009-2012, according to the Volkskrant (see the earlier mentioned link).

At the same time, I wonder why an internal investigation within the Rabobank has to take four years in duration (see again red and bold text), unless you really DON’T want to find anything at all. This has been a disgraceful, six year long fraud indeed and in my humble opinion, this mega-penalty is justified.
However, this is not everybody’s opinion.

According to Kees de Kort, the savvy, but sometimes quite stubborn macro-economist of BNR news radio, this whole Libor-gate affair was just a storm in a teacup and the penalty has been outrageous:

A number of parties tried to manipulate the Libor rate. Tried! Whether they succeeded, nobody knows. It is not that easy, as the rate is settled by 18 or 19 parties, with conflicting interests. To make fraud successful, you would have to make a deal with all 19 parties, which is virtually impossible.
For trying something like this, a penalty of $1 billion seems totally over the top.
Kees de Kort, macro-economist of BNR news radio
Picture copyright of: Ernst Labruyère
Click to enlarge
And now the supervisors all cry blue murder, but where have they been during all these years that this fraud took place. Nobody noticed this fraud during all these years.

On top of that, concerning the topic of bringing the interest down by force, there are two real perpetrators: Ben B. (Bernanke - EL) and Mario D. (Draghi). 
These guys really forced the interest down, at the expense of savers and retirees.

While I don’t agree with Kees upon the ‘innocence’ of the Rabobank’s attempts to manipulate the Libor and Euribor rates, there is certainly some truth in his point-of-view.

What I like least in cases like this, is that the customers of the Rabobank are probably the biggest victims of this fraud:
  • Only the CEO of the bank made a ‘token gesture’ by resigning, just one year ahead of his pension;
  • One of the most responsible executives for this fraud is still in charge and is now even the official spokesman for the bank;
  • The people reputedly involved in the fraud could actually keep their bonuses and sometimes even stayed in their position;
  • And I seriously doubt if any of the Rabobank certificate holders (i.e. members of the numerous local Rabobank cooperations) will ever have to bleed for this huge penalty, through a substantial write-off upon the face value of this bond-like investment.

No, as I see it, the customers will probably foot most of this €774 million bill, through:
  • raised annual expenses for all kinds of products and administrative fees;
  • lower savings’ interest rates;
  • higher margins on the interest rates for term loans and overdraft current accounts. 

And to make things worse, the diminished equity value of the Rabobank will probably lead to lower credit supplies to small and medium enterprise businesses.

The sad conclusion is thus: ‘We [the Rabobank] made a mistake, and you [the customer] must foot the bill for this’. 

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