Editorial: Putting the Lie in Libor

Have you ever felt the whole game was rigged? Well, there’s some justification for that feeling, as the month of June closed out with British banking giant Barclays doing the perp walk and agreeing to pay out a relatively miniscule US$453 million in penalties to U.S. and U.K. regulators to settle their joint investigation into whether Barclays employees were manipulating the iconic London interbank offered rate (Libor).

Libor serves as one of the world’s highest profile interest-rate benchmarks for major financial products such as corporate loans, mortgages, futures contracts and other derivatives, with a total notional value in the many hundreds of trillions of dollars. Libor is calculated daily in a variety of currencies based on rate submissions from a relatively small panel of major banks, including Barclays, and is published by the British Bankers’ Association.

Barclays will pay its penalty to the U.S. Commodity Futures Trading Commission (US$200 million), the U.S. Department of Justice Fraud Section (US$160 million) and the U.K.’s Financial Services Authority (£59.5 million, or US$93 million).

The CFTC order finds that Barclays “attempted to manipulate interest rates and made related false reports to benefit its derivatives trading positions” and “made false Libor reports at the direction of members of senior management to protect its reputation during the global financial crisis.”

Specifically, the CFTC finds that Barclays attempted to manipulate and made false reports concerning two global benchmark interest rates, Libor and Euribor (the analogous interest-rate benchmark used by the European Banking Federation with reference to the eurozone), “on numerous occasions and sometimes on a daily basis” over a four-year period, starting as early as 2005.

The CFTC says these manipulation attempts included Barclays’ traders “asking other banks to assist in manipulating Euribor, as well as Barclays aiding attempts by other banks to manipulate U.S. dollar Libor and Euribor.”

Lastly, the CFTC finds that throughout the global financial crisis in late August 2007 through early 2009, as a result of instructions from Barclays’ senior management, the Bank “routinely made artificially low Libor submissions to protect Barclays’ reputation from negative market and media perceptions concerning Barclays’ financial condition.”

The CFTC gives an example of one trader’s email that stated to a submitter: “We have another big fixing tom[orrow], and with the market move I was hoping we could set [certain] Libors as high as possible.”

Another example was from certain Barclays Euro swaps traders, led at the time by a senior trader, who “coordinated with and aided and abetted traders at other banks in each other’s attempts to manipulate Euribor, even scheming to impact Euribor on key standardized dates,” when many derivatives contracts are settled or reset.

The CFTC notes that the traders’ requests were frequently accepted by Barclays’ submitters, who emailed responses such as “always happy to help,” “for you, anything” or “done . . . for you, big boy,” resulting in false submissions by Barclays. The CFTC says traders and submitters also engaged in similar conduct on fewer occasions with respect to yen and sterling Libor.

The CFTC order also finds that “Barclays, acting at the direction of senior management, engaged in other serious unlawful conduct” concerning Libor. It says “certain senior managers within Barclays instructed the U.S. dollar Libor submitters and their supervisor to lower Barclays’ Libor submissions to be closer to the rates submitted by other banks, and not so high as to attract media attention.”

According to the CFTC order, senior managers even coined the phrase “head above the parapet” to describe high Libor submissions relative to other banks, with Barclays’ Libor submitters being told not to submit at levels where Barclays was “sticking its head above the parapet.”

The CFTC quotes one Barclays U.S. dollar senior submitter in October 2008 saying to 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. 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.”

Barclays chief executive Bob Diamond said that 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.”

Rather than resign, Diamond and three fellow Barclays execs have volunteered to take a pass this year on their bonuses.