Barclays fined $452.5m by US and UK regulators for Libor manipulation

27 June 2012

Authorities on both sides of the Atlantic have been investigating possible manipulation of the London Interbank Offered Rate (Libor) at several banks for a while, including at Citigroup, Lloyds, Deutsche Bank, RBS and UBS, but they have taken action against Barclays today levying a huge US$452.5 million fine.

Libor sets the rate at which banks borrow from each other and acts as the base from which mortgages, car, business loans and everything else is set. It underpins trillions of dollars of derivatives contracts around the world, as well as being used as a reference for all corporate lending. Treasurers will certainly be interested if they have been given a false rate for any of their hedging activities.

As the full extent of the Libor scam was revealed Bob Diamond, the American head of Barclays who famously said last year that the time for banker apologies had passed and is in line for a $26.5m (£17m) pay packet this year, immediately came under pressure to resign. He and other top executives said they'd forgo their bonuses this year, but whether this will be enough to save their jobs is debatable.

According to the Financial Services Authority (FSA) in the UK and the American Commodity Futures Trading Commission (CFTC), Barclays regularly reported borrowing rates lower than the rates it was actually paying during the financial crisis, so that the bank could hide its distress and so that profits could be falsely inflated. The regulators respectively fined Barclays US$92.5m (£59.5m) and US$200 million. Barclays also settled with the US Department of Justice (DOJ) paying a fine of US$160m.

According to emails unveiled by regulators on Wednesday (27 June) traders at Barclays and the ‘submitters’ tasked with reporting daily rates worked together for years to ensure the rates submitted suited the traders' and the bank's purposes, to the detriment of treasurers and consumers on the other end.

Further revelations from the emails show that submitters, in some instances, set themselves reminders on their calendars to submit low rates on specific dates. Other emails reportedly show traders saying thanks for low submissions that protected them from losses. Barclays staff were offered bottles of Bollinger champagne as payment for their favours and, embarrassingly, some individuals replied to traders saying "always happy to help" and "done ... for you big boy".

Largest fines ever imposed

The $200m fine is the largest civil penalty that the CFTC has ever levied and the same goes for the FSA’s $92.5m fine, which also penalised misconduct in regard to the Euro Interbank Offered Rate (Euribor). The European Commission (EC) and Japan's FSA were also involved in the investigation.

The US DOJ, which had assistance from the Federal Bureau of Investigation (FBI) and Securities and Exchange Commission (SEC) in its related investigation, said that Barclays was the first bank being probed that had “provided extensive and meaningful cooperation to the government", adding that the bank's assistance had helped its criminal investigation, and perhaps tacitly suggesting that more banks may be fined in the near future as the full extent of the subterfuge is revealed. Barclays has been in negotiations with the regulators since March.

Tracey McDermott, acting director of enforcement and financial crime, at the FSA said that: “Barclays’ misconduct was serious, widespread and extended over a number of years. The integrity of benchmark reference rates such as Libor and Euribor is of fundamental importance to both UK and international financial markets. Firms making submissions must not use those submissions as tools to promote their own interests.”

“Making submissions to try to benefit trading positions is wholly unacceptable,” she continued. “This was possible because Barclays failed to ensure it had proper controls in place. Its behaviour threatened the integrity of the rates with the risk of serious harm to other market participants.”

“The FSA continues to pursue a number of other significant cross-border investigations in this area and the action we have taken against Barclays should leave firms in no doubt about the serious consequences of this type of failure.”

The British Bankers’ Association (BBA) is currently undertaking a review of the way Libor is set and will publish its findings shortly. The FSA, along with the other authorities, is working to support market-led reviews of existing arrangements, with the goal of ensuring such arrangements continue to command the confidence of all stakeholders, presumably including out of pocket corporate treasurers looking to hedge and other short changed market participants.

Reaction and analysis

The Libor scam at Barclays and other banks immediately attracted criticism with Andrew Tyrie, Chairman of the Parliamentary Treasury Select Committee, admitting that this was a serious breach and he is very concerned about it. "The price-setting mechanism of Libor is crucial to the integrity of the markets," he said. "This appears to have been put at risk. From the information I have, it looks inexcusable."

Others waded into the debate with the shadow treasury minister, Chris Leslie, questioning if there should be a criminal investigation.

In a prepared statement, Barclays' boss, Bob Diamond, said: "I am sorry that some people acted in a manner not consistent with our culture and values."

The whole affair will no doubt further damage the already tarnished reputation of the big multinational banks, which has never recovered from the 2008 crash and the taxpayer-funded bailout of the financial system. Perhaps we might hear less now about the 'onerous post-crash regulations', although I doubt it.

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