Barclays’ market rigging saga is the tip of the iceberg

By Kristy Dorsey and Terry Murden
Published on 01/07/2012 00:00

IT WAS just a chummy email between colleagues. “Dude, I owe you big time! Come over one day after work and I’m opening a bottle of Bollinger.” Out of context, it was no big deal. Just friendly banter between two bankers on a City trading floor.

But revealed last week as part of the Financial Services Authority’s investigation into the setting of key interest rates that affect the livelihoods of thousands, it was dynamite.

Here among a series of other damning emails was proof that traders within one of the world’s biggest and most respected banks – Barclays – were manipulating the London Inter-bank Offered Rate (Libor) to bolster profits for themselves.

The FSA and its US equivalent had no doubt about the bank’s guilt – fining it a total of £290 million for setting artificially low Libor rates. While the customers and even the Treasury were being duped, those involved were benefiting directly from ever-bigger bonuses.

Bad as that was it was only the mid-point in what will go down as one of the worst weeks in the history of the British banking industry. On Monday, the Royal Bank of Scotland was forced to apologise for botching a computer upgrade that left thousands of loyal customers unable to access their own money. That was compounded by the fine levied on Barclays, which brought an apology from the bank’s cavalier American chief executive Bob Diamond, whose position until then had been seen as unassailable. Then on Friday came a further blow as a number of banks – again including RBS – were brought to book for mis-selling financial products (interest rate swap arrangements or IRSAs) to small businesses and would be forced to pay compensation running into millions to customers who lost out.

It all brought a chorus of calls for changes to the banking system that showed no signs of subsiding this weekend. Yesterday the coalition government at Westminster ordered a review of the way Libor will be set in future, while the Treasury Select Committee at Westminster ordered Diamond – who along with Barclays chairman Marcus Agius has resisted demands to resign – to attend the start of an investigation on Wednesday.

Meanwhile, outrage at the working practices of investment bankers already blamed for triggering the financial crash, continued to grow among the public and the business community alike.

Simon Walker, director-general of the Institute of Directors, said the mis-selling of IRSAs was an “outrageous scandal” that had caused personal distress while also damaging businesses. “This news, combined with the exposure of abusive Libor rate manipulation, demonstrates that there is a serious failure of leadership in many of the banks,” he said. “It is high time for a clear-out of the leaders who created this mess, and they should be replaced with new blood.”

But beyond the future of the some of City’ biggest beasts, many questions remain unanswered. How many other banks were involved in the artificial setting of interest rates? How many others were engaged in sharp practices aimed more at lining the pockets of already wealthy City bankers at the expense of ordinary customers. And above all, can any effective action be taken – either economically or politically – to curb the excesses of a financial sector widely believed to have run out of control?

Libor – until last week a little-known term outside the financial industry – has become a household phrase as consumers ask whether and how they might have been left out of pocket by this latest scandal to engulf the sector.

But it was the casual nature of the email exchanges that emerged during last week’s FSA probe that shocked the regulators, shareholders and millions of customers. In one, there were just minutes to go before what is regular City ritual, the setting of Libor, closed for the day. Libor is crucial in determining the price of everything from credit card fees to corporate loans. As the clock ticked down, a Barclays swaps trader fired off an email asking for help in setting an artificially low level for borrowing US dollars... “if it’s not too late”.

The request, sent at 10.52 on a Friday morning in April 2006, promised coffees would “be coming your way, either way, just to say thank you for your help in the past few weeks”. The help he received had been to boost returns on the trader’s speculative interest rate swaps. “Done... for you, big boy,” came the reply, marking a positive close to the week.

The trader’s colleague was a Barclays “submitter”, one of many working in more than 15 major banks to feed the system that sets the average rate at which banks can borrow money from one another. By noon each working day, their collective efforts have established the Libor. As part of their job, submitters must each day answer one simple question: what rate would your bank have had to pay to borrow money just prior to 11am? The combined average fixes Libor.

Overseen by the British Bankers Association (BBA), the process is meant to set a neutral benchmark used to establish rates on global contracts worth some £225 trillion. However, the publication last week of the shocking emails between traders showed how the system was being manipulated in order to drive up profits.

The revelations, immediately forced Diamond, Barclays’ controversial chief executive, into a long apology. And as the storm grew over attempts to manipulate Libor, Diamond conceded that “some” staff had not adhered to the culture and values of Barclays, which admitted to four years of lying about the interest rate it had to pay when borrowing money. Ever-defiant, Diamond resisted calls from across the political spectrum, from trades unions and the public for him to resign. Lord Oakeshott, a former Liberal Democrat Treasury spokesman and long-time critic of the banks, said the chief executive would go “if he had a scintilla of shame”. Prime Minister David Cameron said the management team at Barclays had “some serious questions to answer”.

Sir Mervyn King, the governor of the Bank of England, who has previously criticised the banks for a series of misdeeds, added his strongest condemnation yet, particularly over the market manipulation. “We need to put it right… both the culture and structure... from excessive levels of compensation to shoddy treatment of customers, to the deceitful manipulation of one of the most important interest rates,” King said after presenting the Bank’s financial stability report.

As many as 20 other banks and institutions are under the same investigation that revealed the misconduct at Barclays, and authorities have made it clear that others will be punished. “Don’t think it was just Barclays – they were all in it up to their eyeballs,” says Rob Webb, senior lecturer in banking at Glasgow Caledonian University.

As the extent of the deceit emerged last week, shares in the banks, particularly Barclays, were hammered as investors worried over the possibility of lawsuits being raised, particularly in the US.

Those now coming under the microscope include the likes of Swiss bank UBS, which was among the first to suspend a clutch of traders. Others who have already fired, suspended or seen staff leave after internal investigations include JP Morgan, Deutsche Bank and inter-dealer broker ICAP.

Royal Bank of Scotland has been drawn into the scandal and, while incidents are thought to be more isolated and less serious than those at Barclays, it is also expected to face a heavy fine. Neither the bank nor the regulatory authorities were prepared to comment on a report last week suggesting RBS would face a £150m penalty, but any fine is said to be “months rather than weeks away”, according to one source. RBS faced claims yesterday from one trader in Singapore that he was ordered to fix prices, a claim the bank has denied.

According to the Commodity Futures Trading Commission, the rigging at Barclays began no later than mid-2005 and operated until 2009. It initially centred around efforts by individuals to boost returns on their own deals. But as the financial crisis took hold, submitters were asked to fix their rates low in an effort to make Barclays look more financially sound. The lower the rate, the more it appeared that Barclays was in good health and was able to ride out the credit crunch.

“This is, of course, wholly inappropriate behaviour,” Diamond said in a letter last week to Andrew Tyrie, chairman of the Treasury Select Committee. Neither the bank nor its chief executive have named any individuals responsible for ordering rate manipulations, but this week’s hearing before MPs is expected to be one of the more explosive in the entire banking crisis as pressure mounts for the chief executive to explain himself.

As if matters could not get any worse, on Friday the FSA delivered a damning update on its inquiry into the complex IRSA products. Banks sold these to businesses alongside loans to protect them against rises in interest rate rises. But when rates went down, thousands of businesses found themselves stuck with continuing to pay high charges they weren’t warned about, and problems when they tried to get out of the deals. The banks will be forced to pay compensation to an estimated 28,000 firms, of which 12,000 are with RBS, 7,000 with HSBC, 5,000 with Barclays, and 4,000 with Lloyds.

While compensation in total for the banks will be substantial it is not expected to be comparable to the estimated £8 billion paid out for the mis-selling of payment protection insurance. Lloyds claimed the impact would be minimal. “Given [Lloyds’] limited exposure to these products the financial impact of this remediation and the associated costs are not expected to be material to the group,” it said.

But attempts at mitigating what are seen as serial offences have only prompted more calls for a massive shake-up of the banking industry.

This weekend, pressure for a public inquiry into banking practices and what went wrong was being led by Labour leader Ed Miliband, while the Justice Secretary Ken Clarke pressed for criminal proceedings against anyone found to have manipulated the Libor. The FSA has been in talks with the Serious Fraud Office about the case and the US Department of Justice has confirmed that criminal investigations into “other financial institutions and individuals” are ongoing.

Andrew Sharpe, head of commercial at LexisPSL, said there is also the possibility that the OFT could pursue the banks via competition law if it is established that there was any collusion between them. “Once competition law is engaged, serious penalties become possible, including fines of up to 10 per cent of worldwide turnover,” Sharpe said. “In addition, the cartel offences in the Enterprise Act 2002 might come into play, with sentences of up to five years imprisonment possible.”

Under a historical quirk, the process of setting Libor has always been considered a private activity overseen by the BBA, though the participating banks are regulated by the FSA. However, the BBA has now asked the government to consider taking over supervision.

Whether the current management of the banks will oversee any changes is open to question. On Friday, RBS chief executive Stephen Hester joined Diamond and three of his executives and forfeited his bonus in light of events of the past week.

But some critics of the banks say that forfeiting a bonus before it has even been earned shows how they see such payments as an entitlement rather than a reward and is indicative of the culture of greed the banks seem unable to shake off.

Deborah Hargreaves, chairman of the High Pay Centre, an independent non-party think tank established to monitor pay at the top, said: “Why can’t they say they will work for a pound? They are all multimillionaires, after all.”

Key players

Bob Diamond

Diamond is one of the world’s richest bankers and the man once described by Peter Mandelson as the “unacceptable face” of his industry.

He is now facing calls to quit and has agreed to demands by MPs that he attend the Commons Treasury Select Committee to answer questions about what he knew – and when – about the rate-rigging scandal which occurred when he was in charge of Barclays Capital.

The Local Authority Pension Fund Forum has demanded bonuses dating back to 2005 are clawed back from Diamond and others.

Marcus Agius

The Barclays chairman since 2010 is one of the biggest names in the UK financial sector. But his attempts to characterise shareholder revolts against executive bonuses as a failure of communication have left him open to derision – not least from the shareholders themselves, who greeted his speech at the AGM in April with howls of laughter.

Now, in the wake of the £290 million fines levied on Barclays following the rate-rigging scandal, other lenders have questioned whether his role as chairman of the British Bankers’ Association has become untenable.

Stephen Hester

The straight-talking Yorkshireman has tried to position himself as the man to repair the damage done to the Royal Bank of Scotland by the excesses of the Fred Goodwin era.

He insists the bank is “well on the road to recovery” despite last week’s technical problems which left millions of customers unable to pay bills or access their money, and which are expected to cost hundreds of millions of pounds in compensation and overtime.

He declined a bonus in 2011 and says he will not take one this year either.

Lord Adair Turner

Turner spent his early career in the oil industry before moving into the financial sector. After a spell as the head of the Confederation for British Industry (CBI) he became chairman of the Financial Services Authority in 2008. He said last week that the rate-fixing at Barclays showed “a degree of cynicism and greed that is shocking”.

As well as fining Barclays £60m, the FSA has shared information with the Serious Fraud Office, raising the possibility of criminal prosecutions.