R.B.S. Executives Testify Over Rate-Rigging Case

LONDON - British politicians grilled current and former executives of the Royal Bank of Scotland on Monday about the management failures that led to the rate-manipulation scandal.

Over more than three hours of testimony, the British bank’s chief executive, Stephen Hester, the former head of the firm’s investment banking division, John Hourican, and other senior executives faced questions about why traders were able to report false rates.

Royal Bank of Scotland, which is 82 percent owned by British taxpayers after receiving a multi-billion dollar government bailout during the financial crisis, agreed on Feb. 6 to pay a $612 million fine to American and British regulators over rate rigging. As part of the settlement, the Justice Department forced the firm’s Japanese unit to plead guilty.

It is the latest case to emerge from the global investigation into rate manipulation, which centers on major benchmarks like the London interbank offered rate or Libor. Such rates underpin trillionsof dollars of financial products.

Barclays and UBS previously reached settlements with British and American authorities. Other institutions, including several American banks, are still under investigation in a number of jurisdictions.

During the testimony on Monday, British politicians accused the Royal Bank of Scotland executives of prioritizing short-term profit and fostering a culture that prompted 21 traders to manipulate Libor for financial gain.

“It has brought shame against the bank,” said Rory Phillips, a lawyer questioning the bank’s executives on behalf of the British parliament’s commission on banking standards. “There’s been a loss of trust and confidence on behalf of the public.”

According to regulatory filings, the Royal Bank of Scotland failed to monitor the submissions of benchmark rates. And employees continued to report false rates even after authorities began to investigate the wrongdoing.

The senior executives said they had not been awa! re of the rate-rigging activities that occurred between 2006 and 2010. Senior executives in testimony said that Libor was not been considered a priority for Royal Bank of Scotland, which almost collapsed in 2008 after an ill-advised deal to buy the Dutch financial giant ABN Amro. After the subsequent bailout by the British government, senior managers instead focused on reviving the bank by selling off assets, reducing its workforce and curbing exposure to risky trading activity.

“When we took control of the bank, it had had a cardiac arrest,” said Mr. Hourican, who resigned last week, forgoing past and current bonuses totaling around $14 million in response to the scandal. “We had to prioritize dealing with the existential threat to the bank.”

After the government bailout, Mr. Hourican said Royal Bank of Scotland’s operations had become overly stretched across too many countries and business units.

“The bank was doing too many things in too many countries with too little capita,” Mr. Hourican said.

In testimony, former and current executives said they also didn’t fully understand the extent to which Libor and other benchmarks could be manipulated.

“As captain on the bridge, we have to take responsibility for those events,” said Johnny Cameron, the former chairman of global banking and markets at Royal Bank of Scotland who left the bank in 2008. “No one envisaged Libor could be fiddled by a cartel of traders at a number of banks.”

Lawmakers repeatedly asked executives why the British bank did not have appropriate controls in place to catch the traders’ wrongdoing.

In 2011, the Royal Bank of Scotland told regulators in a letter that systems had been created to monitor Libor submissions. But American and British authorities discovered in their investigations that these controls had not been established, according to the recent settlement. Authorities
said the firm did not deliberately mislead regulators.

“At the very least, t! here was ! a wholesale failure of systems and controls of the rate process,” Mr. Phillips, the lawyer, said. “Somebody in management more senior in the structure should have known what was going on and put a stop to it.”

Mr. Hester acknowledged that the bank had failed to respond quickly to the rate-rigging, and had not improved internal compliance structures.

“The behavior was the disgraceful failure of individuals,” said the chief executive, who is in line for a bonus of up to $3.8 million on top of his annual salary of $1.9 million for last year. “We were slow to recognize that behavior and catch it.”

“During the period of extraordinary boom, hubris set in in this industry,” Mr Hester told lawmakers. the banking sector developed an “excessively selfish and self-centered culture.”

The British bank said last week that it would claw bank past, current and future bankers’ bonuses totaling around $470 million to pay the Libor settlement. The majority of the money will be ued to pay the fines levied by American regulators. As Royal Bank of Scotland is majority-owned by local taxpayers, the penalty from the Financial Services Authorities, the British regulator, will be recycled back into the government’s coffers.

Still, lawmakers remained concerned that the British public was still on the line for the illegal activity of some of the bank’s employees.

“There would be enormous anger if U.K. taxpayers pick up the tab for the individual sins of traders who were trying to rig Libor rates,” said Pat McFadden, a Labour politician who sits on the Parliamentary commission.

Royal Bank of Scotland has fired six employees for their role in the rate-rigging scheme, while another individual was dismissed for an unrelated matter. Eight other people left the bank before the manipulation was discovered, and another six employees have been disciplined, but remain at the firm.

Even so, British politicians demanded to know why Mr. Hourican’s deputy, Peter ! Nielsen, ! had not lost his job despite his role as global head of rates when some of the manipulation had occurred. Mr. Nielsen, who will now co-head of firm’s investment banking operations, said he had discussed resigning with Mr. Hourican, but decided to stay on.

“I was not aware that derivatives traders were making these requests,” Mr. Nielsen told British politicians, in reference to the rate-rigging. “We had very serious issues. Senior management felt that it was a mathematical impossibility to alter the rates.”