Barclays Libor Fine Sends Stocks Lower as Probes Widen
Barclays Plc (BARC)’s record $451 million fines for interest rate manipulation sent bank shares plunging as U.S. and U.K. authorities pursue sanctions in a global investigation of more than a dozen lenders.
Barclays shares slid as much as 18 percent. U.K. Chancellor of the Exchequer George Osborne called for a criminal probe amid speculation that lenders could face billions of dollars in lawsuits, while Prime Minister David Cameron called on Chief Executive Officer Robert Diamond to show accountability.
Traders at the U.K.’s second-biggest bank by assets routinely coordinated with counterparts from at least four other banks in an attempt to move interest rate benchmarks, according to documents released yesterday by the U.S. Commodity Futures Trading Commission, the U.S. Justice Department and the U.K. Financial Services Authority. The benchmarks included the London interbank offered rate, or Libor, and Euribor, a related euro- denominated rate. In both cases, the goal was to generate profits on derivatives held by the banks, the agencies said.
“It’s going to put a great deal of pressure on the other banks to settle because somebody has set a precedent,” said Jerry W. Markham, a law professor at Florida International University and a former chief counsel in the CFTC’s enforcement division.
The case offers the most detailed public account yet of conduct that prompted regulators and criminal authorities spanning three continents to investigate whether traders colluded to rig interest rates and banks sought to bolster their perceived stability by hiding their true costs of borrowing during the financial turmoil of 2008.
At stake is the credibility of the decades-old Libor system and the securities and loan products that rely on it, ranging from an estimated $554 trillion in interest-rate contracts, according to the FSA, to mortgage and credit-card payments made by consumers around the world.
Barclays pledged to pay $200 million to the CFTC, $160 million to the Justice Department, and 59.5 million pounds ($91 million) to the FSA. The fines were the largest in the history of the CFTC and FSA.
“We expect that the cost of lawsuits related to Libor manipulation will dwarf the fines imposed on Barclays,” said Sandy Chen, a banks analyst at Cenkos Securities Plc in London, who is “penciling in multi-year provisions that could run into the billions.”
Barclays tumbled 15 percent to 167.4 pence at 3:19 p.m. in London as Diamond came under pressure from lawmakers.
Prosecutors at the U.K. Serious Fraud Office are now investigating the case, Osborne told lawmakers in Parliament today, calling the matter “a shocking indictment of the culture of banks.” Matthew Oakeshott, a member of the Liberal Democrat party who sits in Parliament’s upper House of Lords, called on Diamond to step down.
“I’m determined we learn all the lessons from what has happened at Barclays,” Cameron told reporters as he arrived in Brussels for a European Union summit. “People have to take responsibility for the actions and show how they’re going to be accountable for those actions. It’s very important that goes all the way to the top of the organization.”
Citigroup Inc. (C), Royal Bank of Scotland Group Plc, UBS AG (UBSN), ICAP Plc (IAP), Lloyds Banking Group Plc (LLOY) and Deutsche Bank AG are among the firms regulators are investigating. A total of 18 banks are surveyed as part of the process of determining Libor and related rates.
RBS shares slid as much as 14 percent today, Lloyds fell as much as 7.8 percent and ICAP dropped as much as 4.7 percent. UBS was down as much as 3.8 percent, and Deutsche Bank declined as much as 5.5 percent.
Barclays is assisting the investigation into other firms and individuals, and was the first to provide “extensive and meaningful cooperation,” the Justice Department said. Zurich- based UBS last year disclosed it had opened its doors to U.S. antitrust investigators in exchange for immunity.
“Over the next relatively short period of time, others are going to have to decide whether either to settle or to fight,” Daniel Waldman, a Washington-based partner at Arnold & Porter LLP and former CFTC general counsel, said in a telephone interview.
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.
Regulators have focused on the lack of so-called Chinese walls to separate traders from employees making interest-rate submissions on behalf of their banks. They are also looking into whether the banks’ proprietary trading desks exploited the information they had about the direction of Libor to trade interest-rate derivatives.
Since March, a group of U.K. bankers and regulators has been reviewing how Libor is set. The group, established by the BBA, has so far resisted calls to overhaul the rate because structural changes risk invalidating trillions of dollars of contracts.
Joseph Eyre, an FSA spokesman, said “the BBA’s review is continuing and we will consider any recommendations arising from that exercise.”
Attempts to influence the rates began several years before the financial crisis, regulators said. Between 2005 and 2008, Barclays’s euro swaps traders coordinated with counterparts at other banks in attempts to manipulate Euribor, according to the CFTC and Justice Department.
Barclays’s employees overseeing Euribor submissions routinely accommodated requests that benefited trading positions at other banks, which were sometimes passed along by former Barclays traders who had left for other financial institutions.
One senior euro swaps trader employed at the time by Barclays spoke daily with traders at other banks about how to change the official Euribor rate in a manner that benefited trading positions, the CFTC said. The agency didn’t name the other banks.
On Nov. 10, 2006, for example, a trader at a bank identified by the CFTC as “bank A” asked the Barclays trader to request a low one-month Euribor setting at Barclays and at a second bank, “bank B.” The Barclays trader made a request to bank B and then sent a message to the Barclays employee responsible for Euribor submissions: “hi [senior Euribor submitter]. I know you can help. On Monday we have a huge fixing on the 1m and we would like it to be low if possible. Tx for your kind help.”
The employee responded: “of course we will put in a low fixing.”
A separate instance occurred over a fourth-month period from at least December 2006 until March 2007 during which the senior Euro swaps trader tried to align trading strategies among multiple banks to influence the three-month Euribor fixing on March 19, 2007, according to the CFTC.
Barclays employees responsible for submitting rates regularly followed the requests of the bank’s derivatives traders. Of 111 requests analyzed by the FSA and made by traders between January 2006 and August 2007 relating to U.S. dollar Libor, only 14 percent of submissions were inconsistent with the requests. Of 42 requests analyzed by the FSA and made by traders from February 2006 to June 2008 relating to Euribor, only 12 percent were inconsistent with requests.
While regulators detailed the attempts to manipulate the rate, they stopped short of claiming the traders were successful. That may prove a stumbling block for private lawsuits claiming that holders of securities tied to Libor were harmed by the conduct, Markham said.
“That really doesn’t help the private litigant so much,” Markham said of Barclays’s settlement. “It doesn’t really give them a road map to say, ‘OK, this is why the price is artificial and here is why they caused it.”’
During the 2008 financial crisis, senior managers at Barclays instructed employees to report artificially low borrowing costs to avoid appearing weaker than its competitors, regulators said.
In October 2008, a Barclays employee had a conversation with the Bank of England about market and media perceptions related to Barclays’s Libor submissions, which had generally been higher than those of competitors. In reaction to the external pressure and the discussion with the central bank, Barclays believed it needed to lower its Libor submissions, the CFTC said.
‘Within the Pack’
A senior Barclays manager then instructed employees to lower Libor submissions for dollars and sterling so the bank would be “within the pack,” or in line with rates reported by other banks, the CFTC said.
According to the U.K.’s FSA, the Bank of England didn’t instruct Barclays to lower its Libor submissions during the phone call. Instead, a “misunderstanding or miscommunication” occurred within Barclays as the substance of the conversation was relayed down the chain of command, the FSA said.
The Barclays settlement helps set a benchmark for what other banks should expect to pay and do to resolve related claims, Markham said.
“Nobody wants to go first, but once they do it becomes easier for the other parties,” said Markham, who added that most regulatory cases are settled, not contested in court. “It’s become the cost of doing business.”