An interesting point about Barclay\’s and Libor

On the manipulation by the bank itself:

It is hard to identify who exactly lost out as a result of these fictions. Since there was no interbank funding to speak of at the height of the crisis, it may not in any case have mattered very much.

Well, sorta. While there was indeed very little interbank lending, this being one of the actual problems at the time, there was still the huge towering edifice of mortgages, swaps, futures and so on priced off this now illiquid measure.

9 comments on “An interesting point about Barclay\’s and Libor

  1. If Barclays were systematically faking LIBOR down, anyone with a mortgage tied to LIBOR has reason to thank them.

  2. The interesting thing is how did the FSA manage to calculate its penalty figure which is primarily meant to remove Barclay’s illgotten gain?

    The FSA also decided, at their option, to discount Barclays’ penalty for its co-operation. And I daresay they have also undertaken not to prosecute Barclays further, and don’t appear to have yet withdrawn their authorisation from anyone as not being “fit and proper”. Why is the FSA taking such a kids glove approach – don’t they understand that this cancer needs stamping out pdq for the good of the City?

  3. As usual the UK press sort of gets it wrong or gives the wrong impression. there were 3 fines, with most of the cash going to the US government, who basically asked for more, and Mr Diamond, not wanting to lose his US passport, paid up at the expense of mostly UK shareholders.

    The FSA fined Barclays £59.5m ($93m) for attempting to manipulate the London Interbank Offered Rate (Libor) and the Euro Interbank Offered Rate (Euribor).

    The US regulator, the Commodity Futures Trading Commission (CFTC), levied a fine of $200m (£128.5m) on Barclays.

    The fraud department of the US Justice Department’s Criminal Division levied a $160m (£103m) penalty to Barclays “in a related manner” – i.e. we hear there is free money being handed out and we would like some.

    It beats me how there can be fraud but no prosecutions, and also how shareholders can allow executives to hand over their money to settle the executives’ criminal cases.

  4. There will need to be individual prosecutions for fraud at some point, but we need to be clear on exactly what the fraud is.

    The people who were defrauded were shareholders and investors, not ordinary people (who by and large benefited from under-valuing of bank funding costs). The purpose of under-valuing the funding costs was to give the impression that the bank’s finances were in better shape than they actually were. It is a racing certainty, I’d say, that all the panel banks were doing this and Barclays felt they had to conform or watch their share and bond prices collapse. It was massive systematic manipulation of key financial data with the intention of defrauding investors and shareholders. I reckon that’s fraud.

    Who exactly authorised this fraud is not entirely clear, but in my view directors must carry the can. Diamond should be sacked, to be followed by CEOs of other banks in due course.

  5. Sorry, should have said “misleading” investors and shareholders. Too many defrauds in that comment!

  6. How do we prevent this happening again? The flaw in Libor is that it relies on banks submitting their perception of their cost of funds. Why not look directly at the actual records of every single interbank transfer? For added security in the process, put these records in the public domain in real-time along with the exact methodology used by BBA (Thomson Reuters ) to calculate the rate. This will allow anyone with a half-decent computer to check the results.

  7. There were two frauds: one on Barclays’ market counterparties, and one, by the panel banks collectively, on investors and shareholders. However, this latter fraud was readily detectable at the time.

    It’s interesting that Euribor was less bent than Libor. The Euribor panel is asked a slightly different question – where do they think other banks can borrow. Perhaps they found it easier to answer that question honestly.

  8. PaulB

    Yes, there were two quite different frauds. Both the FSA and Diamond make that clear. The price-fixing during the financial crisis seems to have been deliberate falsification at the behest of senior management who were worried about adverse reaction in the press if Barclays’ submissions were noticeably higher than everyone else’s. The other, which Diamond is attempting to explain away as due to rogue traders, is actually a massive failure of internal controls. Chinese walls weren’t breached, they were missing completely, and Compliance was gagged. My post explains this – it’s a good partner to yours:

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