Barclays fined over manipulation of interest rates in landmark bank handtwist

Barclays Bank PLC

Barclays has been fined £290m ($450m) for trying to manipulate a key bank interest rate which influences the cost of loans and mortgages.

Its traders lied to make the bank look more secure during the financial crisis and, sometimes – working with traders at other banks – to make a profit.

Barclays said the actions “fell well short of standards”. Chief executive Bob Diamond is to give up his bonus.

The Financial Services Authority is now looking into other banks.

The penalties from the UK financial watchdog and US authorities followed “serious and widespread” misconduct, said the FSA.

Barclays has admitted that a group of traders lied about what it was costing the bank to borrow.

Now, why does this matter?

It matters because lots and lots of deals involving clients of Barclays used the interest rate into which Barclays was feeding this information, about its own borrowing costs, to determine the profit and loss on their own deals.

It’s quite hard to think of behaviour by a bank as shocking as this: not telling the truth about what it is costing you to borrow, that then becomes a benchmark for pricing other deals.

The statement from the US regulator, which levied a big chunk of the fine, talks about how Barclays was working with other banks to try to fix this interest rate.

This of course implies that Barclays is simply the first bank to settle and we will see fines and punishments against some of the other big banks of the world.

The fine is part of an international investigation into the setting of interbank rates between 2005 and 2009.

It seems highly likely that other banks, and in other countries, will face similar sanctions to that of Barclays.

“The FSA continues to pursue a number of other significant cross-border investigations in this area and the action we have taken against Barclays should leave firms in no doubt about the serious consequences of this type of failure,” the UK regulator said.

Three other Barclays executives will also give up their annual bonus this year.

Crucial rates

Barclays’ misconduct relates to the daily setting of the London Interbank Offered Rate (Libor) and the Euro Interbank Offered Rate (Euribor).

These are two of the most important interest rates in the global financial markets and directly influence the value of trillions of dollars of financial deals between banks and other institutions.

They can also affect lending rates to the public, for instance, with some mortgage deals.

But it is not yet clear whether Barclays staff had succeeded in manipulating the interest rates to its advantage and therefore whether it had any impact on borrowers.

Done… for you big boy”

End Quote Extract of exchange between Barclays rate setter and trader

But even so, Tracey McDermott, director of enforcement at the FSA, told the BBC such behaviour was still “completely unacceptable”.

“Libor is an incredibly important benchmark reference rate, and it is relied on for many, many hundreds of thousands of contracts all over the world,” she said.

“And the market needs to have confidence that those who are involved in submitting numbers to set Libor are thinking about the integrity of the market, and confidence in the market, and not their own interests.”

‘Accepted culture’

Each day the British Bankers’ Association and the European Banking Association publish the the Libor and Euribor rates by taking an average of the estimated rates submitted to them by leading banks.

Between 2005 and 2008, the Barclays staff who submitted estimates of their own interbank lending rates were frequently lobbied by its derivatives traders to put in figures which would benefit their trading positions, in order to produce a profit for the bank.

And between 2007 and 2009, during the height of the banking crisis, the staff put in artificially low figures, to avoid the suspicion that Barclays was under financial stress and thus having to borrow at noticeably higher rates than its competitors.

The FSA pointed out that Barclays traders were quite open in their routine attempts to lobby their colleagues who submitted the bank’s estimate of its borrowing costs to the BBA.

It was particularly concerned because it appeared to be “accepted culture” amongst some staff.

“Requests to Barclays’ submitters were made verbally and a large amount of email and instant message evidence consisting of derivatives traders’ requests also exists,” the FSA said.

In one instance, a trader recounted a conversation in which he had “begged” the submitter to put in a lower Libor figure.

“I’m like, dude, you’re killing us,” he said. His manager replied, “just tell him to… put it low”.

In turn, the staff submitting the data would respond to the traders’ requests.

“For you…anything,” said one. “Done… for you big boy,” said another.

And: “I owe you big time… I’m opening a bottle of Bollinger.”


Euro Zone

Barclays ‘attempted to manipulate interest rates’

In its £290m settlement with the Financial Services Authority in the UK, and the Commodity Futures Trading Commission and Department of Justice in the US, Barclays has owned up to something very simple and – many would say – profoundly shocking: for four years between 2005 and 2009, it lied about the interest rate it was having to pay to borrow.

Here is today’s statement from the CFTC:

“Barclays….attempted to manipulate and made false reports concerning both benchmark interest rates to benefit the bank’s derivatives trading positions by either increasing its profits or minimizing its losses. The conduct occurred regularly and was pervasive”.

The CFTC also says that after the start of the credit crunch in August 2007, all the way through to early 2009, Barclays made “artificially low…submissions” about the interest rate it was being forced to pay to borrow to “protect Barclays’ reputation from negative market and media perceptions concerning Barclays’ financial condition”.

This was done, according to the CFTC, “as a result of instructions from Barclays’ senior management”.

In other words, Barclays was pretending that it could borrow more cheaply than was actually the case, to reassure its owners and creditors that lenders had more confidence in it than was true.

Libors and Euribors: What are they?

At the heart of the scandal are market interest rates called Libor and Euribor. These are the interest rates that are supposed to show the average price paid by banks when lending to each other or borrowing from each other.

Their most important role, perhaps, is in setting the prices for complicated financial transactions called derivatives. Here is one example of why these rates matter, in the words of the CFTC: “US dollar Libor is the basis for the settlement of the three-month Eurodollar futures contract traded on the Chicago Mercantile Exchange, which had a traded volume in 2011 with a notional value exceeding $564 trillion”.

In other words, just the dollar version of Libor sets the price for deals with a notional value equal to nine times global economic output or GDP. And that is just a small fraction of the market that is influenced by Libor and Euribor rates.

To put it another way, a tiny difference in the Libor or Euribor rate could determine whether a bank like Barclays – and other banks – would make a profit or a loss on huge derivatives deals. So there was a massive incentive to try and manipulate that rate.

Now to be clear, the CFTC is explicit that other banks were at it too. It says: “certain Barclays Euro swaps traders, led at the time by a senior trader, coordinated with and aided and abetted traders at other banks in each other’s attempt to manipulate Euribor, even scheming to impact Euribor on key standardised dates when many derivatives contracts are settled or reset”.

The FSA and CFTC quote from emails written by Barclays’ traders to their counterparts at these other banks who were requesting this help in rigging markets. The responses included “always happy to help”, “for you, anything” and “done…for you big boy”.

Or to put it another way, it is widely expected that other big international banks will pay big fines and penalties in connection with this scandal.

As for Barclays, its top executives are mortified. The four most senior, led by Bob Diamond, the chief executive, are waiving their bonuses. And disciplinary action has been taken and is being taken against traders in New York, London and Tokyo who committed the offences.

But perhaps what is most important about all of this is that it is another shattering blow to the reputation of the banking industry, at a time when that reputation – many would say – is already at rock bottom.


Robert Peston, Business editorRobert Peston, BBC Business Editor