They
called each other “dude,” “mate” and “amigo,” suggesting a certain
innocence to their friendship. And yet at the center of their
dispatches, United States and British authorities say, was actually a
collusive effort to manipulate worldwide interest rates.
“I’m begging u, don’t forget me,” one Deutsche Bank
trader wrote in an online chat to an employee at a rival bank, seeking
to influence rates. “Pleassssssssssssssseeeeeeeeee ... I’m on my knees
...”
The
messages captured the scheme at Deutsche Bank, which on Thursday became
the latest big bank to settle accusations that it manipulated interest
rates that underpin trillions of dollars in mortgages, student loans and other debt.
To
settle the case, the bank agreed to pay $2.5 billion in penalties, a
record for the interest rate cases, which have already stung the likes
of Barclays and UBS. Deutsche Bank — Germany’s largest financial
institution and, at least for now, a problem child in the eyes of
regulators — also agreed to accept a criminal guilty plea for the
British subsidiary at the center of the case. It is the most significant
banking unit to accept a criminal plea in the long-running
investigation into the manipulation of the London interbank offered rate, or Libor.
Timeline: Tracking the Libor Scandal
While
the deals require Deutsche Bank to dismiss certain employees, no one at
the bank has been criminally charged, though in at least one previous
Libor case, prosecutors charged individuals after reaching a settlement
with the bank itself. “Today’s resolution of the Libor investigation
with Deutsche Bank is in some respects the most significant one yet,”
said Leslie R. Caldwell, head of the Justice Department’s criminal
division, which handled the case along with authorities in Washington,
London and New York, where the state’s financial regulator, Benjamin M.
Lawsky, joined a Libor settlement for the first time.
The
case spotlighted the collusive elements of Wall Street trading desks,
where rival banks have occasionally joined forces to manipulate
financial benchmarks. It also foreshadows looming actions against banks
suspected of teaming up to manipulate the price of foreign currencies,
people briefed on the matter said, with the Justice Department planning
to announce guilty pleas from at least four banks — Barclays, JPMorgan
Chase, Citigroup and the Royal Bank of Scotland — by next month.
“Financial
markets function properly only if customers and competing banks have
confidence that they are untainted by fraud and collusion,” said William
J. Baer, the head of the Justice Department’s antitrust unit, adding
that “the unprecedented size of the penalty” demonstrates just “how far
from that bedrock principle Deutsche Bank and its traders strayed.”
As
the foreign exchange negotiations heat up, the Libor cases are drawing
to a close. In the final chapter of the case, the authorities will
continue to scrutinize three American banks — JPMorgan, Citigroup and
Bank of America — though it is unclear whether those investigations will
result in criminal cases.
Mr.
Lawsky will continue to investigate foreign banks suspected of Libor
manipulation through their New York branches, according to two of the
people briefed on the matter. Mr. Lawsky is also investigating the
foreign currency manipulation.
The
Libor investigation, which began seven years ago with a single
investigator at the Commodity Futures Trading Commission, has spread to
criminal and regulatory agencies around the globe. In addition to the
Justice Department’s criminal and antitrust divisions, Deutsche Bank
settled with Mr. Lawsky’s office, the trading commission and the
Financial Conduct Authority of Britain.
As
part of the deals, the bank will install an independent monitor, the
first such requirement in a Libor case. More broadly, the authorities
ordered the bank to dismiss seven managers suspected of involvement in
the wrongdoing, all but one of whom are in London. They were among 29
employees suspected of playing a role, most of whom have already left
the bank.
The settlement is something of a mixed bag for Deutsche Bank.
In
agreeing to the deals, the bank closes a sordid chapter in its history.
But the terms announced on Thursday will be costly to shareholders, and
could do further damage to the bank’s already battered reputation.
Document: Reports From the Libor Investigations
“We
deeply regret this matter but are pleased to have resolved it,” Jürgen
Fitschen and Anshu Jain, the co-chief executives of Deutsche Bank, said
in a statement on Thursday. “The bank accepts the findings of the regulators.”
The
size of the fine is particularly hard to swallow for the bank, which
had hoped to pay less than $2 billion, one of the people briefed on the
matter said. And while the deals will provide some closure to Deutsche
Bank, they will not end the bank’s legal problems. It is also ensnared
in the foreign exchange investigation. And it is suspected of violating United States sanctions against countries like Iran.
The size of the Libor fine, which eclipsed the $1.5 billion UBS agreed to pay in 2012,
reflected in part the breadth of wrongdoing that the authorities
uncovered. The authorities also denounced the bank for lax oversight of
traders and a failure to respond to warning signs of misconduct. The
bank, the authorities said, also dragged its feet in providing
information, taking two years to provide audio recordings requested by
investigators and accidentally destroying some evidence.
The
wrongdoing at Deutsche Bank lasted from 2005 to 2011 and touched
employees in London, Frankfurt, New York and Tokyo, the authorities
said.
“Markets do not just manipulate themselves,” Mr. Lawsky said in a statement. “It takes deliberate wrongdoing by individuals.”
Manipulation
of Libor, an average of how much banks say they would pay to borrow
from one another, struck a nerve with government authorities. As a
benchmark for trillions of dollars in credit-card loans and other
financial instruments, Libor is a cornerstone of the financial
marketplace.
“Today’s
action against Deutsche Bank reflects the C.F.T.C.’s unwavering
commitment to protect the integrity of critical, global financial
benchmarks from profit-driven traders,” Aitan Goelman, the head of the
trading commission’s enforcement division, said in a statement.
Besides
serving as a guidepost to set rates, the benchmarks are a barometer of
the broader health of the financial system. If banks are paying more to
borrow from one another, it can be a sign that they are unstable, a
concern at the heart of the message in which the Deutsche Bank trader
begged a competitor to submit a lower rate.
Other
times, Deutsche Bank employees would use their submissions to push
reference rates up or down to suit their own financial needs. In 2005, a
Deutsche Bank trader contacted a colleague who was making rate
submissions, to ask, “can we have a high 6mth libor today pls?” The
colleague replied, “sure dude, where wld you like it mate?”
Inside Deutsche Bank, there was widespread recognition of the problem, the authorities said.
In
2009, for example, a Deutsche Bank vice president wrote to a trader
that the Tokyo interbank rate “is a corrupt fixing and D.B. is part of
it!”
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