Here is a good explanation of what Barclay’s did:
Bob Diamond, former Barclays chief, says regulators complicit in rates scandal
LONDON — Fallen banking titan Bob Diamond on Wednesday described regulators on both sides of the Atlantic as partly complicit in a scandal involving the manipulation of a key interbank lending rate, telling a British parliamentary committee that government watchdogs had failed to act after his bank, Barclays, informed them of industry-wide irregularities during the U.S. financial crisis.
The allegations highlight the relationship between financial institutions and regulators at a time when risk-taking and misdoings at big banks again are the focus of debate in Washington, on Wall Street and in London. Diamond stepped down Tuesday as chief executive of Barclays on the heels of a U.S.-British investigation that resulted in a $450 million fine for the bank for manipulating key lending rates between 2005 and 2009. The resignation ended the tenure of a legendary figure who brought a high-flying American-style culture to the bowler-hatted bankers of London’s financial district.
Barclays is one of a number of global banks being investigated for alleged improprieties that tainted the credibility of the London interbank offered rate, or Libor, the benchmark figure that largely determines the adjustable lending rates for U.S. credit cards, student loans and some mortgages. The emerging scandal has touched off a firestorm engulfing the London financial world, with Prime Minister David Cameron this week announcing a broader inquiry into banking standards that is set to haul some of the globe’s most powerful financiers before a parliamentary committee.
At the hearing Wednesday, furious British politicians seemed to put Diamond on trial as if he were the Gordon Gekko character from the “Wall Street” films, blaming him for importing a culture of risk and big bonuses to London. The 60-year-old American sought to defend his response to the Libor scandal, insisting he learned only last month about the extent of wrongdoing among an “abhorrent” but “small” group of 14 rogue traders at Barclays who had been manipulating rates for personal gain.
Diamond also painted a picture of the bank’s accusers — government regulators — as at least partially to blame. Documents released by Barclays on Tuesday night said the bank had “raised concerns” with British regulators, the Bank of England and the U.S. Federal Reserve that other financial institutions were not being honest about interbank lending rates during the financial crisis that peaked in September 2008.
Other banks, Diamond said, were routinely underreporting the rates at which they were borrowing, afraid that revealing how high their costs had soared would spark an investor panic or government nationalizations. He seemed to suggest that regulators were content to see misreporting of interbank lending during times of crisis, when strict accounting of high rates could tighten lending even more, and that they acted to curb such activity only during less sensitive periods.
Asked how regulators responded to Barclays’s reports of widespread misreporting, Diamond said, “Various levels of acknowledgment but no action.”
“There was an issue out there,” he added, “and it should have been dealt with more broadly.”
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Explainer: Why the LIBOR scandal is a bigger deal than JPMorgan
By Dylan Matthews , Updated: July 5, 2012
Last week, Barclay’s admitted to rigging the London InterBank Offered Rate (LIBOR) and agreed to pay U.S. and British regulators $450 million dollars in penalties to settle the case. Then the heads began to roll: On Tuesday, its CEO, Bob Diamond, and COO Jerry del Missier resigned, and yesterday Diamond told a British parliamentary inquiry that regulators in Washington and London alike were complicit in his manipulations.
This is a big deal. Remember that JP Morgan scandal a few months back? That was mostly JP Morgan hurting itself. The LIBOR scandal was Barclay’s making money by hurting you.
In the simplest terms, LIBOR is the average interest rate which banks in London are charging each other for borrowing. It’s calculated by Thomson Reuters — the parent company of the Reuters news agency — for the British Banking Association (BBA), a trade association of banks and financial services companies. The actual process of determining the rates is dead simple, and in fact conducted by only two people. Donald MacKenzie, a sociology professor at the University of Edinburgh, described the process in the London Review of Books:
The calculation of Libor is coordinated by just two people, who work in an unremarkable open-plan office in London’s Docklands. I watched the process, which seemed utterly routine, a couple of years ago. Just after 11 a.m. on every weekday that’s not a bank holiday, traders at leading banks send in their estimates of the interest rates at which their banks could borrow money. They do this electronically, but sometimes the co-ordinators make a phone call to a bank that hasn’t sent in its estimates, and if the latter seem implausible – typos, for example, are fairly common – they’re checked, also with a quick call: ‘Hi there, is the Kiwi chap [provider of the estimates for borrowing New Zealand dollars] about? … Bit of a spread on the two month. Everyone else is coming in a good bit under that.’
A simple computer program discards the lowest quarter and highest quarter of the estimates, and calculates the average of the remainder. The result is that day’s Libor. The calculation is repeated for each of ten currencies and 15 loan durations (from overnight to 12 months), so 150 Libors are published daily: overnight sterling Libor, one-week euro Libor, one-month yen Libor, three-month US dollar Libor and so on.
So why does everyone care about a handful of numbers that a couple guys in an office crunch every day before lunch? The simple answer is that $360 trillion in assets worldwide are indexed to LIBOR, and much of those assets are consumer debt instruments like mortgages, car loans and credit card loans.
In the United States, the two biggest indices for adjustable rate mortgages and other consumer debt are the prime rate (that is, the rate banks charge favored or “prime” consumers) and LIBOR, with the latter particularly popular for subprime loans. A study from Mark Schweitzer and Guhan Venkatu at the Cleveland Fed looked at survey data in Ohio and found that by 2008, almost 60 percent of prime adjustable rate mortgages, and nearly 100 percent of subprime ones, were indexed to LIBOR:
That means that when LIBOR rises, so do the prices ordinary consumers pay to, say, get a mortgage. Which means a bank that mucks with the LIBOR rate isn’t just playing around with esoteric derivatives that will only affect other traders: They’re playing with the real economy that most of us participate in every day.
So how did the manipulations by Barclay’s affect this rate? First, from 2005 and 2007, the bank allegedly varied the rates it reported to the BBA and Thomson Reuters so as to improve its margins on internal trades. For example, it could have placed bets that the LIBOR rate would increase, and then reported artificially high rates which in turn artificially increased the LIBOR averages, so that the bets were likelier to pay off. This not only screwed the investors on the other side of the trade, but bumped up mortgage rates – however infinitesimally – for consumers even when the risk of the loans hadn’t changed at all.
Second, in late 2008 Barclay’s – and, Diamond alleges, other banks – apparently low-balled the rates they reported for LIBOR averaging so as to make the banks’ finances look more stable than they were. The idea was to put out a false image of stability to prevent market panic and stave off calls for additional regulation or even nationalization, a solution that looked increasingly likely during the height of the financial crisis. The direct effect for consumers here was to make loans cheaper, but the indirect effect, or the intended one at least, was to lessen chances of government action against the banks. So the banks manipulating LIBOR weren’t just messing with peoples’ finances – they were trying to mess with the peoples’ laws.
The LIBOR scandal, then, is something more insidious than the multibillion-dollar failed trade that got JPMorgan into so much hot water. Unlike the assets JPMorgan was trading on, the LIBOR rate has real consequences for average consumers, and its manipulation could hurt your typical mortgage-holder, however minimally.
Further, at least some LIBOR manipulation was an attempt to manipulate government policy by changing the very data that regulators use to make decisions. If the LIBOR games prevented governments from pursuing policies that could have made the financial system more stable, the main victims, again, are ordinary con
The Libor, or London Inter Bank Offered Rate, is a short-term interest rate [1] that’s meant to reflect the cost of borrowing between banks. A panel of banks submits estimates daily to a trade group [2], the British Bankers’ Association. Thomson Reuters compiles an average rate for them, discarding any very high or low submissions. That rate is used to set rates for an estimated $360 trillion [3] worth of financial products, all the way down to consumer loans and mortgages. (An analogous process sets the Euribor, for Eurozone banks. For help cutting through all the jargon, see this helpful explainer [4] from American Public Media.)
And why did Barclays traders want to mess with them?
Emails [5] quoted by government regulators show Barclays traders asking employees in charge of submitting estimates for Libor and Euribor to go low or high on a given day (sample: “No probs…low it is today” and “Come over one day after work and I’m opening a bottle of Bollinger! Thanks for the libor.”) Some of the attempts [6] involved former Barclays traders at other banks.
The traders wanted to influence the rates in order to profit on positions they had taken in particular trades and to benefit Barclays’ derivatives portfolio as a whole. Emails and other records show that this occurred frequently from 2005 to 2007 and occasionally until 2009. It’s not clear when, and by how much, the traders’ requests actually affected the rates, though the U.S. Justice Department says they sometimes did [7].
Robert Diamond, Barclays’ CEO, has called these actions “reprehensible [8]” and the bank maintained in a statement [9] prepared for a British parliamentary committee that no one “above desk supervisor level” knew about it at the time. The government’s complaints fault Barclays for not setting controls on how the Libor was submitted.
Barclays’ other Libor problem
Much attention’s been paid to the scheming traders and their emoticon-filled emails [10] but regulators’ complaints also focus on another aspect of Libor manipulation: How Barclays tried to shore up market confidence in the bank’s stability during the financial crisis.
As the filings detail [11], in 2007, Barclays started submitting higher estimates for the Libor, saying they reflected rocky market conditions. But relative to other banks, which were still submitting low rates, Barclays looked risky. The bank maintains it was hamstrung because other banks were going artificially low. “A number of banks were posting rates that were significantly below ours that we didn’t think were correct,” Diamond told a committee of British lawmakers [12] Wednesday.
According to regulators, Barclays management issued a directive [13] that Barclays should not be an “outlier,” and that submitters should lower their estimates to bring Barclays “within the pack.”
In October 2008, with the financial crisis at full bore, Barclays was again on the higher end of rate submissions. That month, according to filings, a senior Barclays manager spoke with a Bank of England official [14] about Libor rates, and the idea that they might be artificially low. Hearing of this conversation, other Barclays managers “formed the understanding” that the Bank of England wanted Barclays to lower its submissions.
This week, Barclays released an email [15] confirming the conversation was between Diamond and Bank of England’s deputy governor Paul Tucker. It was another Barclays manager, Jerry del Missier, who determined what he thought Tucker’s comments meant, Barclays says [16].
On Wednesday, Diamond maintained he did not know [17] about the artificial rate-lowering until the settlement documents were released last month.
The Barclays fallout so far
Barclays settled for approximately $450 million, of which $160 million goes to the U.S. Justice Department [18], $200 million to the Commodity Futures Trading Commission [19], and the rest to the U.K.’s Financial Services Authority. Barclays’ chairman resigned Monday, shortly followed [20] by Diamond and del Missier. As part of the agreement with the Justice Department, Barclays admitted to a set of facts, which may help private lawsuits over Libor manipulation, as this New York Times legal explainer [21] lays out. (Here’s the Justice Department’s “statement of facts [22],” as well as orders of settlement from the CFTC [23] and the FSA [24]).
The Serious Fraud Office in Britain is considering [25] a criminal investigation and the Justice Department could also potentially bring charges against individuals [21] at the bank.
A problem bigger than Barclays
The Barclays penalty is the first to result from a multi-agency investigation into Libor meddling at more than a dozen banks that reaches back [26] to 2007.
The investigation’s next steps hinge on a few questions: Which other banks were traders at Barclays communicating with when they attempted to steer rates? Was similar behavior happening at other banks? And were other banks artificially suppressing rates during the financial crisis?
In his testimony, Diamond stuck by the line that everybody was doing it. And indeed, the revelation that banks might have tried to keep their rates artificially low during the crisis isn’t altogether new—in 2008, the Wall Street Journal reported [27] that banks were submitting much lower rate estimates than other market measures would have suggested. In 2008, the British Bankers’ Association said it had received suggestions that banks were exhibiting “herd [28]” behavior in setting low rates.
The Washington Post notes [29] that a manipulated Libor doesn’t just have repercussions for investors and borrowers, but also for regulatory efforts; by keeping rates low during the financial crisis, the banks were trying to quell concerns about the health of the banking system and “stave off calls for additional regulation.”
So who else is being investigated?
Revelations about other banks have been trickling out over the past year:
· UBS previously made agreements to cooperate with several [21] international [30] investigations [31] in exchange for leniency on potential criminal charges.
· Citigroup was also a target of investigation. Earlier this year, it emerged [32] that a few traders at Citigroup and UBS tried to manipulate Libor rates for the Yen.
· The Times of London reported [33] that Royal Bank of Scotland could soon be hit with a fine of up to $150 million for related charges.
· Bank of America also reportedly received [34] a subpoena last year from regulators as part of the investigation. JPMorgan Chase, Credit Suisse, HSBC and others were also [35] on the Libor-setting panel during the period being investigated.
· Last fall, European regulators seized documents [36] from Deutsche Bank and others regarding manipulation of the Euribor.
Private lawsuits over Libor are already underway. Last summer, Charles Schwab filed a suit [37] alleging anti-trust violations against many Libor-setting banks and at least one class action [38] has been filed alleging that Libor manipulation meant banks paid “unduly low interest rates to investors.”
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