Beyond Barclays: Laying out the Libor Investigations
Charting the revelations about big banks’ manipulation of international interest rates.
Last week, the British bank Barclays was slapped with $450 million in fines and penalties for manipulating information used to set a critical interest rate.
Settlements filed by government regulators in the U.S. and the U.K. show this manipulation happened in two ways: first, Barclays’ traders attempted to steer rates up or down in order to benefit trades they had made to profit off of those rates. Separately, the filings show that during the financial crisis, Barclays tried to counter reports that it had financial troubles by changing the interest rate it reported.
If you’re just catching up to this, here’s some background on the scandal, and how we’ll likely see government action on other banks besides Barclays.
What are these interest rates? How could one bank manipulate them?
The Libor, or London Inter Bank Offered Rate, is a short-term interest rate that’s meant to reflect the cost of borrowing between banks. A panel of banks submits estimates daily to a trade group, the British Bankers’ Association. Thomson Reuters compiles an average rate for them, discarding any very high or low submissions. That rate is used to set rates for an estimated $360 trillion worth of financial products, all the way down to consumer loans and mortgages. (An analogous process sets the Euribor, for Eurozone banks. For help cutting through all the jargon, see this helpful explainer from American Public Media.)
And why did Barclays traders want to mess with them?
Emails quoted by government regulators show Barclays traders asking employees in charge of submitting estimates for Libor and Euribor to go low or high on a given day (sample: “No probs…low it is today” and “Come over one day after work and I’m opening a bottle of Bollinger! Thanks for the libor.”) Some of the attempts involved former Barclays traders at other banks.
The traders wanted to influence the rates in order to profit on positions they had taken in particular trades and to benefit Barclays’ derivatives portfolio as a whole. Emails and other records show that this occurred frequently from 2005 to 2007 and occasionally until 2009. It’s not clear when, and by how much, the traders’ requests actually affected the rates, though the U.S. Justice Department says they sometimes did.
Robert Diamond, Barclays’ CEO, has called these actions “reprehensible” and the bank maintained in a statement prepared for a British parliamentary committee that no one “above desk supervisor level” knew about it at the time. The government’s complaints fault Barclays for not setting controls on how the Libor was submitted.
Barclays’ other Libor problem
Much attention’s been paid to the scheming traders and their emoticon-filled emails but regulators’ complaints also focus on another aspect of Libor manipulation: How Barclays tried to shore up market confidence in the bank’s stability during the financial crisis.
As the filings detail, in 2007, Barclays started submitting higher estimates for the Libor, saying they reflected rocky market conditions. But relative to other banks, which were still submitting low rates, Barclays looked risky. The bank maintains it was hamstrung because other banks were going artificially low. “A number of banks were posting rates that were significantly below ours that we didn’t think were correct,” Diamond told a committee of British lawmakers Wednesday.
According to regulators, Barclays management issued a directive that Barclays should not be an “outlier,” and that submitters should lower their estimates to bring Barclays “within the pack.”
In October 2008, with the financial crisis at full bore, Barclays was again on the higher end of rate submissions. That month, according to filings, a senior Barclays manager spoke with a Bank of England official about Libor rates, and the idea that they might be artificially low. Hearing of this conversation, other Barclays managers “formed the understanding” that the Bank of England wanted Barclays to lower its submissions.
This week, Barclays released an email confirming the conversation was between Diamond and Bank of England’s deputy governor Paul Tucker. It was another Barclays manager, Jerry del Missier, who determined what he thought Tucker’s comments meant, Barclays says.
On Wednesday, Diamond maintained he did not know about the artificial rate-lowering until the settlement documents were released last month.
The Barclays fallout so far
Barclays settled for approximately $450 million, of which $160 million goes to the U.S. Justice Department, $200 million to the Commodity Futures Trading Commission, and the rest to the U.K.’s Financial Services Authority. Barclays’ chairman resigned Monday, shortly followed by Diamond and del Missier. As part of the agreement with the Justice Department, Barclays admitted to a set of facts, which may help private lawsuits over Libor manipulation, as this New York Times legal explainer lays out. (Here’s the Justice Department’s “statement of facts,” as well as orders of settlement from the CFTC and the FSA).
A problem bigger than Barclays
The Barclays penalty is the first to result from a multi-agency investigation into Libor meddling at more than a dozen banks that reaches back to 2007.
The investigation’s next steps hinge on a few questions: Which other banks were traders at Barclays communicating with when they attempted to steer rates? Was similar behavior happening at other banks? And were other banks artificially suppressing rates during the financial crisis?
In his testimony, Diamond stuck by the line that everybody was doing it. And indeed, the revelation that banks might have tried to keep their rates artificially low during the crisis isn’t altogether new—in 2008, the Wall Street Journal reported that banks were submitting much lower rate estimates than other market measures would have suggested. In 2008, the British Bankers’ Association said it had received suggestions that banks were exhibiting “herd” behavior in setting low rates.
The Washington Post notes that a manipulated Libor doesn’t just have repercussions for investors and borrowers, but also for regulatory efforts; by keeping rates low during the financial crisis, the banks were trying to quell concerns about the health of the banking system and “stave off calls for additional regulation.”
So who else is being investigated?
Revelations about other banks have been trickling out over the past year:
· Citigroup was also a target of investigation. Earlier this year, it emerged that a few traders at Citigroup and UBS tried to manipulate Libor rates for the Yen.
· The Times of London reported that Royal Bank of Scotland could soon be hit with a fine of up to $150 million for related charges.
· Bank of America also reportedly received a subpoena last year from regulators as part of the investigation. JPMorgan Chase, Credit Suisse, HSBC and others were also on the Libor-setting panel during the period being investigated.
· Last fall, European regulators seized documents from Deutsche Bank and others regarding manipulation of the Euribor.
Private lawsuits over Libor are already underway. Last summer, Charles Schwab filed a suit alleging anti-trust violations against many Libor-setting banks and at least one class action has been filed alleging that Libor manipulation meant banks paid “unduly low interest rates to investors.”