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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