Barclays Plc (BARC) was fined 290 million pounds ($451.4 million), the largest penalties ever imposed by regulators in the U.S. and U.K., after admitting it submitted false London and euro interbank offered rates.
Chief Executive Officer Robert Diamond and three lieutenants will forgo their bonuses as a result, Britain’s second-biggest bank by assets said in a statement today. “A member of senior management” instructed Barclays’ Libor staff to lower their submissions to make them match other banks and dispel concern about the lender’s health, the U.S. Commodity Futures Trading Commission said.
Derivatives traders requested the false submissions in the Libor and Euribor setting process, as they were “motivated by profit and sought to benefit Barclays’ trading positions,” the U.K. Financial Services Authority said. The settlements with the FSA, the CFTC and the U.S. Department of Justice are the first in an international investigation into whether banks tried to manipulate Libor, the benchmark rate for $360 trillion of securities, to hide their true cost of borrowing.
“Others will follow suit,” said Tom Kirchmaier, a fellow in the financial-markets group at the London School of Economics. “That the company settled and the top leadership team forgoes their bonuses sets the right tone.”
Citigroup Inc., Royal Bank of Scotland Group Plc, UBS AG, ICAP Plc, Lloyds Banking Group Plc (LLOY) and Deutsche Bank AG are among firms that are being probed by regulators worldwide into how Libor is set.
The bank is assisting the ongoing investigation into other finance firms and individuals, and was the first to provide “extensive and meaningful cooperation” to the U.S. government, the Justice Department said. The breaches included “a significant number of employees and occurred over a number of years,” the FSA said.
Barclays declined to comment on any of the FSA and CFTC’s statements or discuss what managers were involved in the Libor submissions.
“The events which gave rise to today’s resolutions relate to past actions which fell well short of the standards to which Barclays aspires in the conduct of its business,” Diamond, 60, said in the bank’s statement.
The FSA said that discussions between Barclays and the Bank of England resulted in a “misunderstanding” down the chain of command whereby lower-level Barclays staff believed they were submitting a lower Libor rate at the Bank of England’s request, which was not the case.
Paul Tucker, then the U.K. central bank’s markets director and now its deputy governor for financial stability, was the official who had the conversation with Barclays, one of many regular market calls, according to a Bank of England spokesman who asked not to be identified in accordance with the institution’s policy.
The FSA’s 59.5 million-pound fine is the British regulator’s largest ever. The CFTC is imposing a $200 million penalty, and the DOJ is fining Barclays $160 million.
“Banks that contribute information to those benchmarks must do so honestly,” said David Meister, the CFTC’s director of enforcement. “When a bank acts in its own self-interest by attempting to manipulate these rates for profit, or by submitting false reports that result from senior management orders to lower submissions to guard the bank’s reputation, the integrity of benchmark interest rates is undermined.”
Barclays traders in New York, London and Tokyo attempted to manipulate rates to benefit their positions in swaps and futures that were tied to the rates, according to the CFTC. They made the requests regularly and sometimes daily from mid-2005 through 2007 and sometimes later until 2009, the agency said in a statement.
At least 14 derivatives traders, including senior traders, made requests to rate submitters at the bank. From January 2005 through May 2009, at least 173 requests for U.S. dollar Libor submissions were made to Barclays’ submitters. That includes 11 requests based on talks with traders at other banks, the FSA said. There were at least 58 requests for Euribor submissions from September 2005 through May 2009, and at least 26 for yen Libor submissions from August 2006 through June 2009.
The Barclays’ submitters responded to the traders’ requests with responses including “for you, anything,” and “done... for you big boy,” according to e-mails released by the regulators. In another such instance, a trader thanked a Libor submitter: “Dude. I owe you big time! Come over one day after work and I’m opening a bottle of Bollinger.”
In February 2007, one of the Barclays traders wrote in an instant message 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 on the imm day, if you breathe a word of this I’m not telling you anything else, I know my treasury’s firepower... which will push the cash downwards, please keep it to yourself otherwise it won’t work.”
Traders at Barclays also coordinated and abetted with traders at other banks to manipulate Euribor, including affecting rates on specific dates when derivatives contracts are settled or reset, according to the CFTC.
“The derivatives traders discussed the requests openly at their desks,” the FSA said. “At least one derivatives trader at Barclays would shout across the euro swaps desk to confirm that other traders had no conflicting preference prior to making a request to the submitters.”
Senior Barclays managers were telling staff to submit artificially low rates to Libor from August 2007 until early 2009 to boost the bank’s financial condition, according to the CFTC. “We didn’t say they succeeded in it,” Bart Chilton, a Democratic commissioner, said in a Bloomberg Television interview, referring to the attempted manipulation.
Barclays “increasingly felt tremendous external pressures concerning how it was being perceived in the market and media” as a result of its higher Libor submissions’’ and believed other banks were lowballing their own figures, the CFTC said.
“The senior U.S. dollar submitter emailed his supervisor, ‘following on from my conversation with you I will reluctantly, gradually and artificially get my libors in line with the rest of the contributors as requested,’’ the CFTC said. ‘‘I disagree with this approach as you are well aware. I will be contributing rates which are nowhere near the clearing rates for unsecured cash and therefore will not be posting honest prices.’’
‘‘The critical regulatory issue and shareholder issue is what do managers do under pressure?’’ said Peter Hahn, who teaches finance at London’s Cass Business School and was formerly a managing director at Citigroup. ‘‘If the answer is under stress you suspend your morality, there’s a problem.”
The CFTC required Barclays to put measures in place to ensure the bank’s transactions, subject to certain adjustments, are given the most weight in determining Barclays Libor submissions. Barclays must put up firewalls between traders and the employees who make the submissions and retain documents and communications about the rates they report, the CFTC said.
“I’m not questioning how the rates are devised, but surely we need to ensure the numbers being submitted are accurate and not trying to game Libor to benefit a bank,” Chilton said in an e-mail. “That’s what Barclays did.”
Libor is derived from a survey of banks conducted each day on behalf of the British Bankers’ Association in London.
Lenders are asked how much it would cost them to borrow from each other for 15 different periods, from overnight to one year, in currencies including dollars, euros, yen and Swiss francs. After a set number of quotes are excluded, those remaining are averaged and published for each currency by the BBA before noon.
“Because mortgages, student loans, financial derivatives, and other financial products rely on Libor and Euribor as reference rates, the manipulation of submissions used to calculate those rates can have significant negative effects on consumers and financial markets worldwide,” said Lanny A. Breuer, assistant attorney general of the Justice Department’s Criminal Division.
Employees responsible for Libor submissions have said in interviews with Bloomberg News they regularly discussed where to set the measure with traders sitting near them, interdealer brokers and counterparts at rival banks. The talks became common practice after money markets froze in 2007, they said, making it difficult for individual bankers to gauge the cost of borrowing from other lenders.
Regulators are focusing on the lack of so-called Chinese walls between traders and employees making interest-rate submissions on behalf of their banks, and whether the banks’ proprietary trading desks exploited the information they had about the direction of Libor to trade interest-rate derivatives.
Barclays received the FSA’s standard 30 percent discount for settling early. The FSA’s biggest fine to date was the 33 million pounds it levied on a unit of JPMorgan Chase & Co. in 2010 over a failure to segregate client money.
As well as Diamond, Barclays said Chief Operating Officer Jerry del Missier, Finance Director Chris Lucas and corporate and investment banking chief Rich Ricci are also forgoing bonuses this year. They had already agreed to cut their deferred bonuses after investors opposed the size of their pay.
Shares of Barclays stayed higher after the announcement and closed 1.9 percent higher at 196.05 pence in London. They are up 11 percent so far this year, ninth-most in the 43-member Bloomberg Europe Banks and Financial Services Index.
“The fine will be seen as a one-off and getting a piece of uncertainty out of the way,” said Simon Willis, an analyst at Daniel Stewart Securities Plc in London.
Diamond got as much as 6.3 million pounds in salary, bonuses and stock awards for 2011 as well as a 5.75 million- pound contribution toward his personal tax bill.