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).

The Serious Fraud Office in Britain is considering
a criminal investigation and the Justice Department could also potentially
bring charges against
individuals at the bank.

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:

·
UBS
previously made agreements to cooperate with several
international
investigations
in exchange for leniency on potential criminal charges.

·
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.”