When Libor broke down, the guesswork began.

Photographer: Simon Dawson/Bloomberg

Barclays Libor Woes Began When It Broke Ranks

Mark Gilbert is a Bloomberg View columnist and writes editorials on economics, finance and politics. He was London bureau chief for Bloomberg News and is the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”
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Five former Barclays traders are on trial in London, accused of rigging money-market rates. A lawyer used a story I wrote nine years ago when the credit crisis was erupting as a stick to beat up bank executives called as witnesses in the case, who deny they were aware of any problems with the interest rates the bank was submitting. With hindsight, I'm increasingly convinced that the scandal came to light because Barclays, unlike its peers, tried to do the right thing by reporting that borrowing costs were surging as financial markets fractured.

The events in the money markets eight years ago led to the demise of Barclays Chief Executive Officer Bob Diamond and the failure of Paul Tucker to win the top job at the Bank of England. They also prompted wide-ranging changes to how benchmarks are set in many financial markets, with investigations following into how commodity prices and currency values are set. And the authorities are still pursuing legal action over the manipulation of market prices that distorted $350 trillion of securities.

Broken Benchmarks

In 2007, I was spending a lot of time watching a suite of borrowing costs known as the London Interbank Offered Rates. Banks were later accused of rigging those rates and paid about $9 billion in fines. More than 20 individual traders in the U.S. and the U.K. have been charged, though only the former Citigroup trader Tom Hayes has been convicted (he is appealing the verdict). But back then I was interested in what the rates were saying about market stress for individual firms. So after new rates published by the British Bankers Association on the last day of August highlighted a jump in borrowing costs for Barclays, I wrote:

Barclays Plc, the U.K.'s third-biggest bank, told the BBA that borrowing pounds for three months would cost it 6.8 percent -- more than any other bank on the panel, and a full 11 basis points above the official Aug. 31 fix. Three-month euros would cost Barclays 4.76 percent, also more than any other contributing bank. Three-month dollars, meantime, would cost 5.75 percent which -- yes, you've guessed it -- was also the highest rate among the 16 institutions canvassed. So what the hell is happening at Barclays and its Barclays Capital securities unit that is prompting its peers to charge it premium interest rates in the money market?

I'd given the press officers at Barclays the opportunity to comment on the Friday, which they declined. The story ran first thing on Monday. Not long after breakfast, I found myself on the phone with a Barclays executive. Speaking off the record, the executive told me I'd gotten the wrong end of the stick entirely. It wasn't that Barclays was paying more for money; his bank, he told me, had decided to address what was really happening in Libor. Its rates looked higher than anyone else's because everyone else was still pretending it was business as usual in the funding world, submitting normal borrowing rates as if money was still freely available. The banks weren't ready to admit that the money market had dried up. Barclays, he insisted, was trying to be the good guy and end the charade.

My instinct was to dismiss his pleadings as self-serving, but I offered to write a second story examining his claim -- on the condition that Barclays went on the record. He declined to do that, which seemed to confirm my skepticism.

Today, I suspect the Barclays executive was telling the truth. Everyone else was trying to conceal just how fractured the markets were becoming. Money wasn't available; so instead of using transactions (actual or potential), the banks were using guesswork -- and no-one wanted the stigma of a high borrowing cost, even if the truth was that money was clearly becoming more expensive every day.

Prosecutors for the Serious Fraud Office disclosed last week that Peter Johnson, the former Barclays trader who was responsible for the bank's Libor submissions, pleaded guilty in October 2014 to conspiracy to manipulate the rates. He has yet to be sentenced; five of his former colleagues, currently on trial, all deny the charges.

I feel a tinge of compassion for Barclays; in the fetid environment of the credit crunch, I can believe that Barclays and its management may have believed they were being leaned on by the central bank to keep Libor lower. So when the August attempt to submit a higher rate that better reflected true market conditions backfired and Barclays found itself suspected of struggling to borrow, I can see why it might abandon that initiative.

Trying to paper over the cracks in the money markets by lowballing Libor submissions, if that is indeed what was happening, would have been wrong and bound to backfire. But given that Libor rates at the time were clearly a matter of guesswork rather than calculation, it's possible to see how an entire industry could convince itself that being economical with the truth about borrowing costs was serving some public good in maintaining confidence in the financial system.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Mark Gilbert at magilbert@bloomberg.net

To contact the editor responsible for this story:
Therese Raphael at traphael4@bloomberg.net