Throughout this discussion, we will discuss ethical behaviors in finance. You may draw from personal experiences, your own research, or what you have learned from the readings.
READ
Read the Finance in Action in Chapter 8 of your text, concerning ethical behaviors associated with manipulation of the LIBOR.
RESPOND
After reading, answer the following questions being sure to provide examples supporting your position.
- What is your reaction to this article?
- Are ethical behaviors in finance different that ethical behaviors in other aspects of life
- Defend your position and provide examples.
- Provide outside resources to support your response.
Finance in ACTION LIBOR Price-Fixing Scandal Ethics During the summer of 2012, it was discov- promising to "scratch your back if you scratch ered by British regulators that the LIBOR mine." Barclays and UBS of Switzerland were (London Interbank Offered Rate) was being at the heart of this process, but as many as manipulated. LIBOR is the rate that banks 16 banks were investigated. Barclays and are willing to lend to each other, it is the rate UBS paid fines of about $6.0 billion, making that bank estimates it would pay to borrow it one of the largest scandals in banking his- from another bank. It is an estimate, not the tory. As a result, UBS fired 18 traders and the actual amount that the bank paid. Every day, respected CEO of Barclays, Bob Diamond, the London banks participating in the rate set- resigned. Morgan Stanley estimates that ting process send their estimated LIBOR rate 11 banks could pay total fines up to $14 billion to Thomson Reuters (an international financial by the time the investigation is done. For data company). Thomson Reuters throws out example, Deutsche Bank agreed to pay a the top and bottom 25 percent and uses the $2.5 billion fine for its participation in the rate middle 50 percent of the rate quotes to list rigging scheme the current day LIBOR rate. There are over Evidently, the U.S. Federal Reserve sus- 100 different LIBOR rates for many existing pected this bad behavior as early as 2007 and maturities. notified the British regulator, Financial Services LIBOR is an important rate because it is Authority, but they didn't deal with the warning the most widely used base rate in the world. in a timely fashion. We end this discussion with It is the base rate used for home equity loans, a telling quote from Doug Dachille, the former adjustable rate loans, commercial loans, head of proprietary trading at JPMorgan: derivative swaps, and other financial transac- "I have always viewed collusion and market tions. When we say base rate, it is because manipulation as financial crimes deserving of the rate is adjusted for risk, so a high-quality prosecution of the appropriate individuals and borrower might pay LIBOR plus 2 percent and harsh consequences for senior management a low-quality borrower might pay LIBOR plus for a failure to supervise. I would be pleased to 5 or 6 percent. The amount of face value con- see more of this by financial regulators. Unfortu- tracts that may be pegged to the LIBOR rate nately, the regulators are the equivalent of a JV has been estimated to be between $300 tril- team competing against varsity players. They lion and $800 trillion, and the actual number simply lack the financial and industry know-how could be even higher to uncover these insider 'tricks' of the trade." It turns out that in the summer of 2012 a group of traders and bankers conspired to Source: Doug Dachille, "The LIBOR Scandal: Not fix these rates. There were numerous e-mail That Big a Deal?" The Business Desk, PBS Newshour, quotes with traders, brokers, and bankers January 9, 2013
