Banking Standards Evidence

19 01 2013

th-54On Thursday 10 January 2013 the Joint Committee of the Parliamentary Commission on Banking Standards Mr Andrew Tyrie (Chair), the Lord Bishop of Durham, Mark Garnier, Baroness Kramer, Lord Lawson of Blaby, Mr Andrew Love, Mr Pat McFadden, Lord McFall of Alcluith and Lord Turnbull took oral evidence by examining Huw Jenkins (former Investment Bank CEO, UBS) Jerker Johansson (former Investment Bank CEO, UBS), Dr Marcel Rohner (former Group CEO, UBS) and Alex Wilmot-Sitwell (former joint Investment Bank CEO, UBS). The evidence is available here. Moreover, Dr Diane Coyle (Enlightenment Economics), John Fingleton, (former chief executive, Office of Fair Trading) and Clare Spottiswoode CBE, former director general of Ofgas and Member of the Independent Commission on Banking) were also examined. Their evidence is available here.

Both these documents make extremely interesting reading and some of the questions and answers are set out below:

Chair: Thank you very much for coming to give evidence today. I would like to begin by asking you, Mr Rohner, how you rate this as a scandal in terms of banking scandals in history.

Dr Rohner: I was shocked when I read about it. I felt embarrassed and ashamed.

Chair: How big is it?

Dr Rohner: It is in a series of scandals that happened at UBS, some under my watch. That makes it all together bigger.

Chair: Is it the biggest in Swiss banking history?

Dr Rohner: When I look back at the time I was managing it, I felt the fight for the survival of the bank was in some ways going deeper than this specific misconduct of a group of people.

Mr McFadden: Okay. In the evidence that we have received so far about other banks, we have often been told that these activities are by a small group of traders. I just want to establish the scale of this, according to the FSA’s final notice. It says that there were 800 documented requests for manipulation of Japanese yen LIBOR, around 90 of sterling and a small number in other currencies. It talks about 40 identifiable individuals being involved, and a number of other banks being involved. The FSA use the phrase in paragraph 32 of the final notice, “The manipulation of submissions was routine, widespread and condoned”. This wasn’t a small group of rogue traders, was it? This was deep in the culture of the bank.

Huw Jenkins: It was an extremely pervasive part, clearly, of this business area. The thing that shocked me—like Mr Rohner, I was very shocked and upset when I read about this report and what had happened on my watch—is that I think the interest rate and STIR area accepted this as sort of normal practice. That deeply shocks me because it’s clear, with a very simple reading of what happened, that this was completely abhorrent and completely against fair and transparent markets.

Mr McFadden: So you’re not claiming that there was a small group of rogue traders; you are accepting that this was widespread in the business practice of the bank in that area.

Huw Jenkins: I am accepting that it was widespread within that business area. I think there are vast other parts of the bank where the highest ethical standards were adhered to throughout this period.

Mr McFadden: But given your acceptance that it was widespread in that business area, is it really credible for us to be told that no executives were aware of what was going on?

Huw Jenkins: I know that you find it hard to believe that, but it was indeed the case. During my period as CEO of the investment bank, the issue of LIBOR submissions, or the issue of the conflict with respect to LIBOR submissions, was never raised in any forum. I believe that the report indicates that there were five internal audits over this five-year period where nobody identified this as being a conflict, which, with the benefit of hindsight, is very hard to believe, but it’s a fact.

Mr McFadden: What does that say about the worth of those internal audits?

Huw Jenkins: They clearly failed to pick up a material conflict. I cannot deny that.

Mr McFadden: I would like to go along the row and ask all of you when you found out there was a problem with LIBOR manipulation at UBS.

Dr Rohner: I found out about it from press reports that UBS had started an investigation. I think it was in 2010 or 2011—I do not exactly remember the time.

Jerker Johansson: The same—from the press. I believe it was somewhere around 2011.

Alex Wilmot-Sitwell: In 2011.

Mr McFadden: So all of you were in senior positions—CEOs of the investment bank or higher—and you are all telling us that you knew nothing about widespread, sustained manipulation of LIBOR by a group of traders in your bank connected with traders at other banks until you read about it in the press. What does it say about the worth of the management at UBS, when you have to find out what is going on in your own bank, among your own traders, by reading about it in the newspapers? Would anybody like to comment on that?

Chair: Why don’t you have a go, Mr Jenkins?

Huw Jenkins: Pardon?

Chair: Why don’t you reply?

Huw Jenkins: Look, clearly I am deeply sorry that we did not spot this. It is clearly a failing in our systems and controls and in our culture that it was not highlighted through whistleblowing or other checks and balances in the system. I believe that where issues were raised, or where we identified these kinds of conflicts and risks, we responded promptly and properly. At the end of the day, this issue was not raised and genuinely we were not aware of it.

Mr McFadden: Mr Johansson, you were Mr Jenkins’s successor, is that correct?

Jerker Johansson: That is correct. I started on 17 March 2008 as the CEO of the investment bank.

Mr McFadden: You have just told us that you didn’t know about this until you read it in the press, but UBS carried out a specific review of its LIBOR submissions in 2008, didn’t it?

Jerker Johansson: I now know that from reading the FSA report.

Mr McFadden: So you didn’t know when you were the chief executive of the investment bank that your own bank was carrying out a review of the conduct of its LIBOR submissions?

Jerker Johansson: That was not brought to my attention. If I can put this in context, when I started at the bank in March 2008 I was made responsible for a group of approximately 20,000 people. That coincided with the beginning of the real financial crisis. I had to rely on the communication that existed in the bank to bring to my attention issues that were important. I accept that I had a responsibility to actively seek out information and things that concerned me. However, I failed to recognise this LIBOR issue as being one of those issues.

Mr McFadden: I am afraid I find this extraordinary. You have told us not only that you were not aware of what these traders were doing, but that even when there was an internal review within the bank about what they were doing you, their ultimate boss, did not know it was taking place.

Jerker Johansson: I believe the internal review was done by compliance, which is separate from the business unit. If compliance do not bring it to the attention of the management of the investment bank, we would not know.

Mr McFadden: So who at executive board level had responsibility for these reviews, which the FSA has described as inadequate in design and implementation?

Jerker Johansson: That would be the legal department.

Mr McFadden: Did you even talk to the legal department?

Jerker Johansson: I talked to the legal department about issues that they brought to my attention, and I talked to the legal department about issues that I wanted to have clarified. As I said, I had to rely on the communication effort and the system that existed to bring it to my attention.

I would also say that when I was made responsible for the investment bank, I felt that there were three key priorities for me, and in those I think that I was extremely active. One was to reduce the balance sheet of the bank, which had grown to enormous proportions. The second was to reduce the risk level and, as much as possible, manage the very substantial risks that were on the balance sheet of the investment bank, for which I was responsible. Lastly, as the new chief executive, I spent an enormous amount of time introducing myself to all parts of the investment bank and trying to make sure that I got as close to the business as I possibly could by communicating transparently, travelling to various locations and talking to our people and our clients about what was going on at the bank.

Mr McFadden: Well, if you were doing all this meeting and greeting of different parts of the business, didn’t you meet the people who were doing the LIBOR submissions or their managers?

Jerker Johansson: I would certainly have met their managers, and they did not bring that up and I did not ask about it. I did not see it as being one of the key risk areas for the bank at the time. That was clearly a mistake.

Mr McFadden: To call it a mistake is a little mild. The picture that has been presented is one of gross negligence of what was going on within the business.

Jerker Johansson: I think that it is a failure, yes.

Mr McFadden: Let me ask you how much the bank was making from this, because you would have been interested in your balance sheet. One particular trader who was at the heart of this—the senior yen trader—generated a total of $260 million in profits for UBS during his time there. He did it on an exponential scale. He generated $40 million in 2007, $80 million in 2008 and $116 million in 2009 before he left for a job at another bank. Were you aware of the rapid growth in profits from areas such as yen derivative trading? Did you ever ask any questions about why the probability of this trading had grown so much?

Jerker Johansson: I started on March 17, and I left in April 2009.

Mr McFadden: Which is pretty much the period that I am talking about.

Jerker Johansson: Well, for 2009, I do not think that we would have had all the information about the first quarter by the time—.

Mr McFadden: What I am asking is, were you aware that there was a growing centre of profitability on yen derivative trading?

Jerker Johansson: No, I was not.

Mr McFadden: You were not. Can you tell us what kind of personal reward would have gone to a trader who generated $260 million in profit for the bank? Ballpark?

Jerker Johansson: That is heavily dependent on the capital and the risk that were involved in generating those profits. I do not know what exactly the metrics were of the profitability of that business, but in my evaluation of the fixed-income business, I felt that capital and risk had been underpriced and therefore the profitability of many of these businesses were really overstated compared with the resources of the bank that were used in generating them.

Mr McFadden: Do you accept that, if a bank or a trader makes profit by artificially manipulating a trade and fixing the odds in the bank’s favour, that is effectively stealing from the person on the other end of the trade?

Jerker Johansson: I think that that is absolutely right.

Mr McFadden: So the bank was engaged in widespread stealing from its clients.

Jerker Johansson: I think that the bank failed and made a number of mistakes that have been covered by the report.

Mr McFadden: Presumably, during the course of this period there were various statements. I have the latest one: the code of business conduct and ethics at UBS. It is full of very grand statements about social responsibility and ethical and responsible behaviour. You would have had statements like this during the period you were in charge of the bank.

Jerker Johansson: Absolutely, yes.

Mr McFadden: What were they worth in relation to the actual conduct that we are talking about today?

Jerker Johansson: As it relates to this group of individuals, clearly they were not followed or lived up to. I believe that, in the conduct of people in banking, it is much more about culture and values than about code of conduct statements. Codes of conduct tried to put on paper the way in which we all were expected to act in conducting the business of the bank.

Mr McFadden: That is what I am asking, really What are these statements worth in relation to the actual conduct? I suggest to you that they are worthless.

Jerker Johansson: In this case, I think you are right. One of the reasons why I was trying to have a very transparent and visible leadership style was because I felt that the values of the bank had to be expressed from the top and that, as we were going through an extremely difficult period of time, one of the key things we had to do was to communicate those realities to the members of the bank so that they felt that they were getting the information they needed in dealing with clients and the problems.

Mr McFadden: But leadership is about knowing what is going on in your business. You didn’t know what was going on in your business. You were in blissful ignorance of the widespread manipulation of interest rates and, indeed, as you have told us, in ignorance of an internal review of those practices which was carried out while you were the chief executive of the investment bank. What does that say about your leadership?

Jerker Johansson: Well, that part of it is a failure, which I accept. But I would also say that you have to put this in the context of the environment that we were in as we went through 2008. So my focus as head of the investment bank was to make sure that we were prudent in the way we managed our risk. I spent a lot of time proactively making sure that we were marking our positions correctly, which I think is very important. I spent a lot of time dealing with clients and employees to make sure they understood what was going on.

Chair: On this failure of leadership you have described, Mr Johansson, you do agree that it was negligence, don’t you?

Jerker Johansson: I think I would describe it as a failure, yes.

Chair: As negligence?

Jerker Johansson: I don’t quite understand the precise difference between negligence and failure.

Chair: In that case you would agree that it is negligence, as you can’t tell the difference.

Jerker Johansson: Okay.

Chair: Perhaps I could turn to you again, Mr Rohner. We have just heard a really appalling catalogue—actually, we have not by any means articulated all of it. How personally responsible, as deputy chief executive and then chief executive of UBS, do you feel for this?

Dr Rohner: I feel accountable for what has happened in the bank under my watch. When I was leading it I tried whatever I could do to remedy all the problems which surfaced.

Chair: We have just had described to us a completely worthless control procedure, haven’t we?

Dr Rohner: The control procedures worked in some parts and obviously did not work in other parts, which is why I think they were not completely worthless but they were not sufficient to do what they were supposed to do. It is also almost like a paradox: I felt we came from a period when we were known for having really good controls, and also in part by early failures where we learned a lot, and we had very strong credit risk control at the beginning of the 21st century. We came very well through the technology bubble. In hindsight I feel that we relied too much on what we thought was going well. We had overestimated our abilities in the area of risk control. It was also almost that we had in many ways too much of it.

When I spoke to the shareholders at my first annual general meeting in 2008, I addressed the issue that we had a mechanistic reliance on risk processes, which in many ways sometimes led to an abdication of self responsibility by some other people, so they felt that if control says yes, or the report is okay, then we can do that. While it was filled with best intentions and it had a period when it worked well, it was clearly inadequate once the bank grew to the size and complexity it had in 2006 and 2007, which is why I feel that reducing the complexity of the institution is critically important to creating an environment which is manageable and controllable.

Chair: Do you agree with Mr Johansson that that there was board negligence?

Dr Rohner: No. I feel that we tried as best we could with the best of intentions. In many ways and on many occasions, we were successful, and in others, we had to recognise, once all these things happened, that it was insufficient and inadequate.

Chair: Do you agree with Mr Jenkins that this business otherwise was wholly ethical and well controlled?

Dr Rohner: When I look at the entire bank, for all the years I was there, and particularly for the years I was at the helm, I see 80,000 people of whom the vast majority were good. They tried to do their very best and worked very hard, and they suffered tremendously from all the problems we had. The people at the bank are neither worse nor better, but there was obviously an environment—more than in other places—that led people to do bad things.

Chair: I just want to be clear. You are saying that you were not responsible but that you were accountable, and that there were mistakes but that you were not negligent?

Dr Rohner: If you ask me about my personal responsibility, I would say that I did the best I could.

Chair: Yes. You told us that you knew nothing whatever about LIBOR and very little about the LIBOR market. Is that correct?

Dr Rohner: Yes, that is correct.

Chair: During your period as chief executive, you gave a presentation in London to investors in December 2007, which is still on the UBS website. In it, you set out what you considered to be your competitive strengths. Do you remember that presentation? You led it.

Dr Rohner: That was presumably around the first capital raising, but I do not recall the details of the presentation.

Chair: When you are chief executive, do you pay particular attention to high-growth, high-margin areas of your business?

Dr Rohner: When I was chief executive, the way I recall those 20 months is that from almost the first day I was in there we were in a state of crisis.

Chair: So you were not looking at high-growth areas?

Dr Rohner: I was?

Chair: You were not looking at high-margin areas. In this dark sea of crisis, you were not looking at even the odd glimmer of light that seemed to be showing up as high-growth, high-margin activity?

Dr Rohner: My time was split between different things. In my recollection today, the strongest and most testing time—

Chair: I am sorry to interrupt, but I am just trying to pose the question: don’t all chief executives keep an eye out for outliers—very good and very bad? If they have a very good outlier, don’t they keep an eye on that and find out why they are making money and why that part of the business is growing? Were you not doing that?

Dr Rohner: I agree with that in normal times, but the times when I was leading this institution were so extreme that I was permanently fighting for survival. We had three capital raises within 10 months. I had about eight profit warnings that I had to report and huge losses in five out of six quarters. The focus really was how to raise enough capital and reduce the risk quickly enough to create enough liquidity to see through this unprecedented term.

Chair: Mr Rohner, I have a presentation in front of me that you gave in London in December. The presentation, which is still on the UBS website, sets out to investors what you consider to be the core strengths that needed to be maintained and consolidated. Under the heading “competitive strengths” it sets out high-growth, high-margin businesses. Do you remember what they were?

Dr Rohner: We were always—

Chair: Do you remember any of them?

Dr Rohner: Yes, we were always differentiating ourselves because we had a very large wealth-management business, which we considered one area of growth. We also had, in comparative terms, a very strong business in Asia, and in Switzerland we had a very high market share in the retail business, which was not a business that was growing fast. On those strengths we wanted to set out our future strategy. Within the investment bank we had had for decades a very strong equities business.

Chair: I am just asking what you emphasised in this presentation. I have it in front of me, so I am just seeing whether you can remember as a high-growth, high-margin part of your business. I am absolutely flabbergasted that you cannot remember; in fact, I find it almost incredible. I’ll tell you. There was only one: structured LIBOR. In this presentation, the only area listed as a core strength in maintaining and consolidating your leadership as a bank, the only area listed as a high-growth, high-margin business, is structured LIBOR. Before you gave that presentation, didn’t you ask, “How are we making all this money? How are we growing this LIBOR part of our business?”

Dr Rohner: It was a presentation from 2007 on the occasion of the first capital crisis. I do not recall the details of the presentation.

Other posts in relation to LIBOR are available here, here, here and here.


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