What the UBS Libor emails said

The Financial Services Authority has just hit UBS with its biggest ever fine - £160m - as well as a damning description of the Swiss bank's malfeasance in the Libor market.

But it also did more than that.

It has also released a string of documentary evidence - emails, instant messaging chat sessions, and phone call transcripts (all trader phone calls at investment banks are recorded).

What follows are some of the more colourful excerpts from those records, and an explanation of what was going on at the time.

(Warning: Contains repeated use of strong language)

Conflict of interest

The root cause of the Libor scandal was that traders at UBS - and at the other big, international banks - stood to make a profit depending on how the Libor interest rate was set each day.

Libor is a market rate published by the British Bankers Association, supposedly reflecting the borrowing costs of a dozen or more banks based in London. It calculates each day's Libor based on borrowing rates submitted by the banks.

Perversely, between January 2005 and September 2009, the traders responsible for UBS's Libor submissions were actually in a position to profit directly from how the Libor rate was set, creating a conflict of interest.

This did not stop other traders lobbying the submitters for higher or lower rates, as on this occasion, when one submitter vented his irritation to his line manager that two different UBS traders were trying to push the rate in opposite directions:

As I said to you, I got to say this is majorly frustrating that those guys can give us shit as much as they like... One guy... wants us to do one thing and [second unnamed UBS trader] wants us to do another.

Middle managers were also actively involved in the manipulation, although, as one pointed out, they also had one eye on the bank's reputation:

as i said before - i dun mind helping on your fixings, but i'm not setting libor 7bp [seven hundredths of a percentage point] away from the truth i'll get ubs banned if i do that, no interest in that

Common knowledge

UBS management evidently assumed that other banks were up to the same trick.

When one manager pleaded with his boss for permission to raise their own Libor submission in the hope of making more money, he argued:

...everyone will be trying to influence the fixing next Monday reflecting their positions. If we don't do the same we risk an adverse PL [profit and loss].

A senior manager sensibly responded by moving the discussion offline:

I will call you from the airport for an update on this

Some of the traders were much less concerned about leaving a paper trail behind. On one occasion, two of them openly discussed manipulation on an electronic chat forum with 58 participants.

One of them belatedly posted the line:

JUST BE CAREFUL DUDE... i agree we shouldnt ve been talking about putting fixings for our positions on public chat

Collusion with brokers

The FSA found evidence of more than 1,000 occasions of collusion between UBS and 11 brokers at six different brokerage firms, mainly to fix the Japanese yen Libor market.

Brokers are responsible for bringing different banks together anonymously as buyers and sellers, to help them trade without giving away too much information about their trading position that could be used against them.

The collusion happened in several ways.

For example, UBS asked brokers to tailor their "run-throughs" - their overview of market sentiment and activity that they discuss with traders at the other banks - to benefit UBS's position in yen interest rates.

Brokers would also "spoof" the market on behalf of UBS - creating a false illusion that there was more demand on one side of the market than really existed, by advertising bogus requests, in order to influence the interest rates offered by the banks.

For example, in a telephone call a broker told a UBS trader that he had been:

offering... some cheap [three-month Libor] all morning and I shouted them down at [unnamed rival bank] as well... we were offering them at 50 mate... that wasn't even true

UBS paid off brokers to the tune of £15,000 every three months over one 18-month period.

One was of achieving this was via "wash trades" - buying and selling from the trader simultaneously, so the trades cancel each other out, but the difference in price generates a profit for the broker.

Here is a UBS trader openly offering to bribe a broker:

if you keep 6s [six-month yen Libor] unchanged today ... I will fucking do one humongous deal with you ... Like a 50,000 buck deal, whatever ... I need you to keep it as low as possible ... if you do that .... I'll pay you, you know, 50,000 dollars, 100,000 dollars... whatever you want ... I'm a man of my word

Collusion with banks

The FSA also unearthed 80 cases of direct collusion between UBS and traders at four other unnamed banks.

The brokers facilitated this collusion, as the following conversation with a trader at one of UBS's rivals demonstrates:

Trader: Alright, well make sure he [the UBS trader] knows

Broker: Yeah, he will know mate. Definitely, definitely, definitely

Submitter: You know, scratch my back yeah an all

Broker: Yeah oh definitely, yeah, play the rules.

In one case, a UBS trader openly discussed ways of rigging the Japanese yen market in an electronic chat session with a counterpart at another bank.

He boasted how good his working relationship at a third bank was, saying he was

mates with the cash desks, [unnamed bank] and i always help each other out... [three-month] libor is too high cause I have kept it artificially high.

UBS traders were evidently grateful for the assistance that their supposed competitors lent them. One trader told his rival:

Anytime i can return the favour let me know as the guys here [the traders who submit UBS's Libor rate] are pretty accommodating to me

On another occasion, the UBS trader told his supposed competitor that his assistance had been "beyond the call of duty!"

Operation 6m

In 2009, one of the UBS traders was particularly keen to make money from a six-month yen Libor position that was to expire shortly, dubbing his campaign to manipulate the interest rate "Operation 6m".

The trader promised one broker whom he wanted to influence traders at rival banks: "do your best and i'll sort you out", later adding "v v v important pls try extra hard mate".

The UBS man was co-operating directly with two other banks to manipulate the interest rate, prompting another broker to name them the "three muscateers [sic]", adding that an unnamed trader a fourth bank was "in for a a shock", because the trio "could do him a fair bit of damage".

The UBS trader was not afraid of aggressively pursuing his "Operation 6m", writing to one broker: "HIGH 6M SUPERMAN... BE A HERO TODAY".

That broker replied relatively meekly: "ill try mate... as always"

In contrast, another broker took a more gung-ho approach, promising that he was "putting the captain c[h]aos outfit on as we speak".

However, the sheer size of the operation did cause some nerves. Here is what one broker told the UBS trader:

if you drop your 6M dramatically on the 11th mate, it will look v fishy, especially if [unnamed bank] and [unnamed bank] go with you. I'd be v careful how you play it

Financial crisis

Just how far up within UBS's management knowledge of the malpractice went is unclear from the FSA report.

However, what is clear is that after the financial crisis began in August 2007, a commandment came down from on high to lowball the bank's Libor submissions, even at the risk of losing money, in order to make it look as though UBS still had the confidence of its lenders.

Here is how one internal email among senior managers put it:

It is highly advisable to err on the low side with fixings for the time being to protect our franchise in these sensitive markets. Fixing risk and PNL [profit and loss] thereof is secondary priority for now.=

Then, in April 2008, the Wall Street Journal published an article that implied that some banks were setting their Libor submissions far too low.

That prompted management to tell traders that UBS should henceforth be "middle of the pack" - that is to say in the mid-range of Libor submissions from other banks.

This did not go down so well with traders, as the following instant messaging exchange highlights:

Trader 1: [management] want us to get in line with the competition by Friday

Trader 2: ...if you are too low you get written about for being too low... if you are too high you get written about for being too high...

Trader 1: middle of the pack there is no issue...

Trader 2: and if you are in line with the crowd you get written about because the crowd is too low...

Damned if you do, damned if you don't.