Barclays Plc (BARC) saved itself 25.5 million pounds ($40 million) in fines by moving first to settle a probe over the rigging of global interest rates. In return, it has lost three top executives, $5 billion of market value and sparked a government inquiry.
Barclays, still the U.K’s second-largest lender after losing a fifth of its market value in two weeks, is one of at least 12 banks including Citigroup Inc. (C) and HSBC Holdings Plc (HSBA) under investigation for manipulating the London interbank offered rate. The decision to cooperate with regulators before its competitors in exchange for more lenient treatment has backfired, analysts and investors say.
“They had a difficult tactical and regulatory decision to make, and they have paid the first-mover penalty,” said Owen Watkins, a former regulator with the U.K. Financial Services Authority who is now a lawyer at Lewis Silkin LLP in London. “Effectively, they were cooperating in putting their heads in the noose.”
Chief Executive Officer Robert Diamond, under pressure from policy makers and investors, resigned yesterday after the bank was fined a record 290 million pounds last week for rigging Libor as well as Euribor, its equivalent in euros, starting as early as 2005. Diamond, 60, will face questions from lawmakers at a Treasury Select Committee hearing today on how the bank failed to prevent the abuse of a benchmark used to set interest payments on $500 trillion of securities from mortgages to swaps.
Libor and Euribor are calculated by a survey of banks’ daily estimates of how much it would cost them to borrow from one another for different time frames and in different currencies. Because submissions aren’t based on real trades, the potential exists for the benchmark to be manipulated by traders hoping to profit on where the rate is set. Barclays’s executives also were downplaying their borrowing costs by making low submissions to avoid the perception they were in trouble, according to regulators.
Diamond, the U.K.’s best-known banker, must explain “the nature of the manipulation, who was involved, how long were they involved for, was it escalated, did they inform the regulator, did they inform the Bank of England,” said Dominic Rossi, chief investment officer for equities at Fidelity Worldwide Investments, one of Barclays’s 10-biggest shareholders, according to data compiled by Bloomberg. “I don’t think anybody should underestimate the seriousness of this,” he said in a telephone interview.
While Barclays says it’s yet to set Diamond’s severance package, he may be entitled to a payoff of between 2 million pounds and 21 million pounds, according to Manifest Information Services Ltd., a proxy voting firm that advises clients managing 3 trillion pounds of assets.
Barclays was the first bank to cooperate “in a meaningful way” in disclosing its conduct, the U.S. Justice Department said in a statement last week. “From the outset Barclays’s cooperation has been extraordinary and extensive in terms of quality and type of information and assistance provided,” the Justice Department said. “The nature and value of Barclays’s cooperation has exceeded what other entities have provided in the course of this investigation.”
By cooperating with regulators Barclays’s managers tried to end the issue quickly and move on, said a company executive, who declined to be named because the talks were private. They expected investors would react positively after the bank successfully negotiated a reduction in fines, the executive said. The FSA agreed to cut its fine to 59.5 million pounds from 85 million pounds, the London-based regulator said in its June 27 settlement document.
“It was our decision to cooperate as well as we did with the authorities, and indeed, remarkably, they complimented us on it, but that was done deliberately and notwithstanding the fact that it would mean that we were probably going to be first into the public arena and there’d be consequences,” Barclays Chairman Marcus Agius, 65, said on a call with reporters yesterday. “This seemed to us the right way to do it.”
The bank also expected to gain credit for alerting regulators that competitors were masking difficulties in borrowing money during the financial crisis by submitting artificially low rates, according to the executive who declined to be named.
Barclays spoke to the Bank of England, the FSA, the Federal Reserve Bank of New York and the British Bankers’ Association 33 times in 2007 and 2008, the lender said in a statement to lawmakers yesterday. In those conversations it “consistently” raised concerns that its competitors were low-balling the rate, the bank said. Barclays’s three-month dollar Libor submissions were in the top quartile 89 percent of times from Sept. 1, 2007 to Dec. 31, 2008, the bank said in the statement.
“Barclays did not understand why other banks were consistently posting lower submissions” and “firmly believe that the other panel members were not, in fact funding at a lower cost than Barclays, and we were disappointed that no effective action was taken,” the bank said.
Barclays has spent 100 million pounds investigating the issue, according to the London-based firm. “It is ironic that there has been such an intense focus on Barclays alone, caused by our being first to settle in the midst of an industry-wide, global investigation,” the company said.
Investors and analysts are now questioning the logic of that decision.
“I am surprised they came out first,” Laurence D. Fink, 59, chairman of New York-based BlackRock Inc. (BLK), said in an interview with Erik Schatzker and Trish Regan on Bloomberg Television’s “Market Makers.” BlackRock is the world’s largest asset manager and Barclays’s second-biggest shareholder, according to data compiled by Bloomberg.
“I think they have suffered hugely by being the first to settle,” Ian Gordon, an analyst at Investec Plc (INVP) in London, said in a telephone interview. “With the benefit of hindsight, it’s been strategically disastrous.”
The stock was down 1.7 percent at 164.2 pence as of 9:34 a.m. in London trading today. Barclays shares have fallen 20 percent since June 20 to 167.05 pence while the 43-company Bloomberg Europe Banks and Financial Services Index (BEBANKS) has gained 2.3 percent. Jerry Del Missier, 50, who was named chief operating officer last month, and Agius, the chairman, will follow Diamond in leaving the bank.
Royal Bank of Scotland Group Plc (RBS), UBS AG (UBSN) and Credit Suisse Group AG (CSGN) are among banks awaiting their fate as regulators from Tokyo to London to New York investigate. UBS said the U.S. Justice Department’s antitrust division granted it immunity regarding submissions for yen Libor and Euroyen Tokyo Interbank Offered Rate, or Tibor, after it was first to offer assistance. It was granted immunity in Switzerland over suspected manipulation of yen Libor, Tibor and Swiss franc Libor rates, the bank said.
FSA Chairman Adair Turner said yesterday that the investigations into Libor are at various stages “reflecting the cooperation of firms and their willingness to settle.”
Bankers and traders under suspicion may have to wait months because regulators in the U.S. aren’t ready to bring actions against other banks, according to people briefed on the matter, who declined to be named because the talks are private.
“Barclays is now the benchmark,” said Watkins, the former FSA regulator. “They have been fined, they have lost their chairman and they have lost their chief executive. If you are the chairman or the CEO of these other institutions, you might be sleeping a little less soundly in your bed at night.”
Other firms may face less severe sanctions, said Frank Braden, a banking analyst at Standard & Poor’s in London.
“People realize that that’s not in the best interest in the long run to have a constant turnover of the heads of these large banks,” Braden said. “A lot of these banks have already recently had new replacements for their CEOs. They have already paid the price of past mistakes.”
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