You might have missed the latest bank scandal, the one involving Barclays (BCS), in the hubbub of the U.S. health-care ruling and the euro salvage plan. If so, here’s what you need to know: On June 27, Barclays, the U.K.’s second-largest bank by assets, admitted that it deliberately reported artificial borrowing costs from 2005 to 2009. The false reports were used to set a benchmark rate, the London interbank offered rate, or Libor, which affects the value of trillions of dollars of derivatives contracts, mortgages, and consumer loans. The bank agreed to pay a hefty $455 million to settle charges with U.S. and U.K. regulators, and on July 2, Chairman Marcus Agius resigned.
On July 3, Chief Executive Officer Robert Diamond also resigned. Agius then reversed his decision to quit; he will stay on to lead the search for a new CEO. In an apology to employees before he stepped down, Diamond wrote that some of the misconduct occurred on his watch, when he was head of Barclays Capital, the investment-banking unit. Diamond was already in the doghouse with investors: In April, 27 percent of shareholders, upset that Barclays had missed profit targets, voted down his $19.5 million pay package.
Heads should roll at other banks, too. Regulators and criminal prosecutors, including officials at the U.S. Department of Justice, are investigating at least a dozen other firms to determine whether they colluded to rig the rate. Among them: Citigroup (C), Deutsche Bank (DB), HSBC Holdings (HBC), and UBS (UBS).
Run properly, big banks have just as much a right to exist—and thrive—as any other corporate entity. But it’s difficult to defend an industry that defrauds the market with fake interest rate figures, thereby stealing from other banks and customers. The Libor case reveals something rotten in today’s banking culture. And we hope the investigations will expose the bad actors, lead to jail terms for those who knowingly manipulated the market, and force out the senior managers and board directors who participated in or overlooked such conduct.
In the Barclays settlement documents, regulators released smoking-gun e-mails that reveal the extent of the dirty dealing between bank traders (looking to protect profits and bonuses) and senior officials in bank treasury units (hoping to convince markets that their banks weren’t in financial difficulty). The two aren’t supposed to collude, but it’s obvious that the Chinese walls between them come with ladders.
Libor and its euro counterpart, the Euribor, are benchmark rates determined by banks’ estimates of how much it would cost them to borrow from one another, in different time frames and currencies. The banks submit sheets of numbers every weekday morning, London time. An adjusted average of the rates determines the size of payments on mortgages and corporate loans worldwide. The rates also serve as an indicator of the health of the banking system. Because some submissions aren’t based on real trades, the potential exists for manipulation.
A Barclays banker responsible for reporting borrowing rates was told to make the bank look healthier than it was by not revealing that borrowing costs had risen. An e-mail he wrote to a supervisor confirms that he complied: “I will reluctantly, gradually and artificially get my libors in line with the rest of the contributors as requested,” he wrote. “I will be contributing rates which are nowhere near the clearing rates for unsecured cash and therefore will not be posting honest prices,” he continued, referring to rates in the overnight money market.
At times, Barclays traders sought to affect rates on dates when interest-rate derivatives contracts were fixed or settled, thus profiting more from trades, according to documents made public by the U.S. Commodity Futures Trading Commission, one of the agencies conducting the Libor probes. Here’s an e-mail about the three-month rate from a senior Barclays trader in New York to the London banker who submitted the rates: “Hi Guys, We got a big position in 3m libor for the next 3 days. Can we please keep the lib or fixing at 5.39 for the next few days. It would really help. We do not want it to fix any higher than that. Tks a lot.”
Bankers submitting rates responded to such requests as if they were routine: “For you, anything,” and “done … for you big boy,” according to the e-mails. Not that the efforts went unappreciated: “Dude. I owe you big time!” one trader wrote to a Libor submitter. “Come over one day after work and I’m opening a bottle of Bollinger.”
Barclays traders also coordinated with counterparts from other banks. In an instant message, one Barclays trader wrote to a trader at another bank: “If you know how to keep a secret I’ll bring you in on it, we’re going to push the cash downwards. … I know my treasury’s firepower … please keep it to yourself otherwise it won’t work.”
The Libor system, overseen by the British Bankers Association, operates much the way it did in the 1980s. Even after the news media uncovered evidence of manipulation in 2008, the bank lobby did little to reduce conflicts or improve the veracity of its numbers. The best solution, as Bloomberg View has advocated, is to end Libor and create a benchmark using data from actual loans, rather than relying on banks to tell the truth about their borrowing costs.
The real tragedy of the scandal is the apparent lack of ethics or self-restraint among the people involved. Following billions of dollars of trading losses at JPMorgan Chase’s (JPM) out-of-control London unit, the latest installment of the Big Bank Follies offers yet more proof that the industry shouldn’t be trusted to regulate itself.