By Mark Thompson and James O'Toole @CNNMoneyDecember 19, 2012: 7:45 AM ET
Swiss bank UBS will pay $1.5 billion in penalties after admitting to fraud in its role in manipulating global benchmark interest rates.
The settlement follows a far-reaching investigation by regulators and law enforcement officials around the world into the setting of the London Interbank Offered Rate, or Libor, and related interbank rates.
UBS said the payment would settle claims with U.S., U.K. and Swiss authorities. The bank has agreed to a non-prosecution deal with the U.S. Department of Justice covering all its subsidiaries except UBS Securities Japan, which pleaded guilty to one count of wire fraud.
The investigation revealed extensive misconduct over a period of six years by at least 45 UBS staff, including senior managers, who sought to influence rates to benefit the bank's trading positions and make it look stronger during the financial crisis.
UBS was found to have colluded with other banks and brokers, making corrupt payments to brokers worth £15,000 per quarter over a period of 18 months.
"We deeply regret this inappropriate and unethical behavior," UBS chief executive Sergio Ermotti said in a statement. "No amount of profit is more important than the reputation of this firm, and we are committed to doing business with integrity."
Neither Ermotti nor UBS chairman Axel Weber were at UBS during the Libor-rigging period. Ermotti has begun a major restructuring, including shedding 10,000 jobs, aimed at shrinking UBS investment bank and focusing on wealth management.
The fine is the second biggest in banking history and more than three times the size of the penalty imposed earlier this year on British bank Barclays for fixing Libor. It follows a series of expensive mistakes for UBS(UBS).
Libor is a collection of rates generated for various currencies across 15 different time periods. The quotes are then used as benchmarks for roughly $10 trillion in loans and some $350 trillion in derivatives. For example, an adjustable-rate mortgage might require you to pay interest based on a Libor rate plus 2%.
To set Libor rates, groups of banks are asked what interest rate they would have to pay to borrow money for a certain period of time in a certain currency.
In June, Barclays(BCS) admitted to manipulating Libor to appear stronger during the financial crisis, deliberately understating its borrowing costs, and to benefit trading positions tied to the rate. As part of a settlement with U.S. and U.K. regulators, the bank agreed to pay more than $450 million. Barclays chief executive Bob Diamond and chairman Marcus Agius lost their jobs as a consequence.
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But the scandal is bigger than just one or two firms. In addition to Barclays and UBS, more than a dozen other banks involved in setting Libor are being investigated by authorities around the world, and further penalties are expected.
Among those facing scrutiny are Citigroup(C), Deutsche Bank(DB), JPMorgan(JPM) and HSBC(HBC).
The British government is in the process of implementing the findings of a review of Libor, which include transferring responsibility for the rate-setting process from the British Bankers' Association, a trade group, to a new administrator regulated by the Financial Conduct Authority.
In addition to the corporate settlements, some individual bankers may be held to account. Earlier this month, British police arrested three men in connection with the Libor probe.
The banks that set Libor are also facing a blizzard of legal actions from plaintiffs who claim they lost money on Libor-related investments due to the benchmark's manipulation.
The Baltimore city government is the lead plaintiff in a class-action suit against Barclays and other banks. All told, analysts believe the firms implicated in the scandal will rack up billions in losses from the pending litigation and regulatory penalties
Ermotti said it was too soon to say whether clients had lost out as a result of UBS's behavior, which he described as "an industry issue."
"We are far from having an understanding of the effect of the actions of multiple institutions on the actual rate fixings, which one would need to know before trying to determine whether or how clients were affected," he said in a memo to staff.
The mounting penalties are not only embarrassing for the banks -- they also risk eating up capital that could be used to support lending. The Bank of England warned last month that British banks may have to raise new capital, in part because they had underestimated the cost of past misconduct.
UBS said Wednesday it expected to make a loss in the fourth quarter as a consequence of provisions for litigation and regulatory issues, but predicted pre-tax profit of $2.75-3.3 billion for the year.
Just last week, London-based lender HSBC(HBC) agreed to pay $1.9 billion in a settlement with U.S. regulators over money laundering, a record for a case involving a bank.
UBS was fined nearly $50 million by British regulators last month after it failed to prevent a rogue trader from running up $2.3 billion in losses last year. In 2009, the bank paid $780 million as part of a deferred prosecution agreement in which it admitted to helping U.S. taxpayers hide money from the IRS.