Who will save us from the Masters of the Universe and the Wall Street wizards? In 2008 they brought the globe to the brink of financial collapse and last week they destroyed the integrity of the London Interbank Offered Rate (LIBOR), the benchmark used to set interest rates world-wide. Here’s how Barclays bank did it and why.*
Before we start there are two things you need to know about LIBOR.
One—LIBOR is set by the British Banking Association (BBA). Each day BBA asks 16 banks to submit their interbank interest rates—the interest rate another bank would charge the submitting bank if it wants to borrow money. This interbank rate is set for a number of currencies and for 15 time periods ranging from overnight loans to one year loans. BBA ignores the 4 highest and 4 lowest submissions and averages the remaining 8 to set the LIBOR for all of those currencies and time periods.
Two—the rate submitters, the bank’s treasury department, are not supposed to talk to the bank’s traders in the rate setting process because the traders sell financial instruments based on LIBOR. If the traders can influence the LIBOR they would have to draw upon every fiber of their moral being to resist the urge to fiddle the LIBOR in their favour.
Fiddling the LIBOR for Personal Greed
On the topic of moral fiber, Barclays traders recognized that if they could convince Barclays’ rate submitters to submit LIBOR numbers that suited their deals they would maximize Barclays’ profits and minimize Barclays’ losses—and boost their bonuses to boot! Of course this meant that the person on the other side of the deal, the mortgage company, pension fund, insurance company, whoever, would make a smaller profit or suffer a greater loss which increased costs to the consumer, but who cares.
Emails between Barclays’ traders, rate submitters and outside traders demonstrate how blithely this was done. The LIBOR under discussion is a rate which will go into effect 3 months hence (the 3 m libor).
Trader 1: “where do u think 3 m libor will be today?”
Trader 6: “submitter thinks 38”
Trader 1: “wow…unchanged!!?!???!…if it comes in unchanged I’m a dead man ha ha”
Trader 6: “I’ll have a chat”
Later that day Trader 1 contacts Trader 6: “Dude, I owe you big time! Come over one day after work and I’m opening a bottle of Bollinger! Thanks for the libor!”
Trader 6 (who, in addition to a lack of morals, doesn’t know how to spell): “know worries!!!”
Did the traders know they were doing something wrong? Some say that the existence of these emails is proof that the traders weren’t trying to hide their actions—they thought it was fine. Another possibility is that the traders were too dense to realize that their emails, text messages and recorded phone calls live forever in the ether and would respond to the siren call of a subpoena. (That’s one of the problems with being a Master of the Universe, these mundane details can slip by you.)
Fiddling the LIBOR for Corporate Self Preservation
In addition to the manipulation of LIBOR by individual traders, Barclays deliberately understated its LIBOR submissions to BBA. It wanted to avoid the impression that other banks were concerned about its financial health and were charging it higher interest rates for interbank loans.
Interestingly, Bob Diamond, Barclay’s ex-CEO, says the Bank of England was aware that Barclays and other banks were understating their LIBOR submissions and implicitly approved this practice. Mr Diamond says Mr Tucker, Deputy Governor of the Bank of England, told him that it did not always need to be the case that [Barclays] appeared as high as [it had] recently”. Mr Diamond passed this message on to his Chief Operating Officer who instructed his staff to continue to underreport the interbank rate.
Mr Tucker denies this allegation. But consider this: Barclays contacted the UK securities regulator, the Financial Services Authority (FSA), 13 times in the course of a year**to express concern that all banks were understating LIBOR to protect their reputations in the fallout from the 2008 financial crisis. Barclays told the regulators that it was “not clean clean, but clean in principle” and “we’re dirty-clean, rather than clean-clean”. Good lord, do the regulators need to be hit over the head with a mallet?
Barclays was fined $451.4 million for its misconduct. Barclays’ CEO and 3 other top executives graciously offered to forgo their bonuses for the year. That promise vapourized when the CEO and the COO abruptly “resigned”. There are no criminal charges pending against any of Barclays executives. The bank was granted “leniency” for cooperating with the investigation.
Prime Minister David Cameron called for a parliamentary inquiry into the UK banking industry. The inquiry will likely recommend even more legislation.
That would be unfortunate. The last thing we need is another arcane and ultimately ineffective law to address the problem of gross irresponsibility bordering on criminality in the finance industry. A quick look at the Dodd-Frank Act demonstrates that in spades. What we need is the creative interpretation of existing criminal, quasi-criminal and securities legislation already in place and the political will to enforce it.
If the Masters of the Universe are facing jail time, the loss of their personal fortunes and the prospect of being barred from ever working in banking again (goodbye fat bonuses and cushy directorships), they might think twice before rolling the cosmic dice for their own personal gain.
*Research for this article is taken from articles in the New York Times Online (Sept 7, 2010, Jun3 27, 2012, July 2, 3, 4, 2012 and Reuters.com June 28, 2012.
**Barclays contacted the US Federal Reserve 12 times in the same one year period.
The closer a person is to the money, the more they seem able to forget their responsibilities to their clients and to their society. It is a sad thing when people carry on business without regard to ethics, and with minimal attention to the law. Thanks, Susan, for the clear discussion of the LIBOR scandal. I shudder to think what the ongoing investigations will turn up. I do not want London to lose its place as a world financial capital. Is that far-fetched?
Jill, this is a fascinating case. Mr Tucker, the Deputy Governor of the Bank of England, is fighting for his professional life as he tries to defend himself from Barclay’s assertion that the B of E knew banks were lowballing LIBOR. This week the parliamentary committee put into evidence meeting minutes which indicate that Mr Tucker of the B of E knew about this behavior in 2007. In the words of the parliamentary committee chair: “This doesn’t look good, Mr Tucker. In these minutes, we have what appear to any reasonable person as the lowballing of rates”. The news accounts indicate that Mr Tucker may have irreparably damaged his reputation and lost the chance to step into the Governor’s job when it opens up. So he loses his promotion and we lose what little trust we had left in the banking industry and those who regulate them. This has got to stop.
Thanks for that note, Susan.
I keep thinking about how a little reputational damage has a huge impact in this context. Usually in finance when you hear the word “leverage” (or “gearing” as the Brits have it), it’s all about debt and equity and pretty straightforward financial ratios.
Fiddling with LIBOR is a very high-leverage activity in a different way, but the lever or gear metaphor certainly holds. A little doubt has a big impact. I’m going to try and watch some of that testimony on video. Must be on YouTube by now.
If Mr Tucker knew, how many of his staff and associates knew? How many banks knew?
Where were the whistle blowers? Ignored, stifled, or afraid to speak up?
And a better question, do the Masters of the Universe still think this is just a game?
Banks and Financial Institutions, with the silent approval of governments around the world, have become the legalized robbers of how era. The Barclay’s Bank story you mentioned above is just another example of the type of atittude it is now almost expected from these Banks.
I suggest you read the book ‘Thieves of Bay Street’ by Bruce Livesey. I sm sure it will turn your stomach but then again it seems the number one trait of our current democratic political/economical system.
Carlos, this is going to be a HUGE case. The investigations have been broadened to include virtually all of the big banks and the lawyers have figured out this is a license to print money so the lawsuits are starting to roll in. The city of Baltimore is the first one out of the gate but the other municipalities, pension funds and hedge funds won’t be far behind.
I firmly believe that the only way to change the culture and behavior of the big banks is to press criminal charges against all of those who cross the line. This includes the CEOs who profess to know nothing. If a CEO of a company that breaches environmental laws can be sent to jail even though he wasn’t the one who dumped a pollutant into the river, then a CEO of a bank that broke the law can go to jail even though he says he didn’t know anything about it because in both cases, it’s the CEO’s job to ENSURE this sort of thing does not happen. Period.
Thanks for the book suggestion, I’ll check it out.
Susan I do hope you are right. Again I am not so sure. These people, just like many before them will get the best lawyers that are more than willing to do anything for the money. It is a vicious circle. Maybe one will go in but the rest are all out there doing the same thing and Governments are in bed with them. Please do read the book I suggested to you and then it would be great to have one of your weekly posts to be about this book. Almost like a book club roundtable. I am sure that if you read it, you will agree with me.
These are the only places where one can have a decent conversation anyway. The newspapers are just as biased as the ones that own them and if not, they are on the way to bankruptcy. The new mind setters are now the Ezra Levants and Glenn Becks and all that bunch of people that I would like to accept as someone with a different view point, but I have to say that I cannot understand idiot atittudes as a different point of view.
The good news is that helped by the greed and stupidity of Ultra Conservative governments around the world, people are on fire and it will be just a question of time before we will have some real action. Not sure it will fix the problem but at least it will be a change. Spain and Greece in Europe and Egypt and Syria in the Middle East certainly could start a domino effect the world has not seen since the fall of Monarchies in the first world war.
In the meantime here in our great Alberta, we have no government again. It seems the premier moved to China and must be playing a guitar on the streets for some change. Emergency Room issues disappeared, democratic deficit is no topic, I am not even sure the Legislature is still running. The only concern seems to be the oil sands and pushing for more and more development despite the fact that we run out of energy with five plants shutting down at the temperature of 32 degrees. This would be the same as saying that we cannot supply gas to heat the houses in Alberta at the temperature of -5!
Well it is just deregulation. Nothing serious.
Coorection – ‘robbers of our era’
Jill: you asked whether Mr Tucker’s staff and his associates knew that the banks were fiddling with LIBOR. In March 2012, the BBA set up a panel to review how LIBOR is set. The panel “has resisted calls to overhaul the rate because structural changes risk invalidating trillions of dollars of contracts” (Bloomberg Online, 12-07-12). Seems to me that’s already happened. I don’t know where this will end but it’s beginning to feel like the 2008 financial meltdown. How can anyone lend to anyone else if no one trusts the benchmark LIBOR?
Carlos: Just to pick up on the discussion about the lawyers…Mr Diamond, Barclays’ ex-CEO, has top notch legal representation in the form of Andrew Levander. Mr Levander’s is very experienced in these types of cases. His clients include Jon Corzine, the head of the bankrupt finance firm MF Global and John Thain, the ex-CEO of Merrill Lynch. Mr Diamond’s defense team will go for the jugular in order to get their client off. The only way that Mr Diamond can win is if he shows that the Bank of England and the regulators were well aware of what Barclays was doing and condoned it. That will force the governments to fix the regulators. At the same time, the public has had it up to here with bankers who are paid like royalty. Shareholders are insisting on changes to executive pay. Hopefully this two pronged approach will result in meaningful improvements. Time will tell.
Susan I fully trust what you described and in no way I meant to doubt it. What I doubt is the resielence of people being able to do what should be done in face of the obstacles most of these people manage to raise due to their large financial power. After all it would not be the first time. In fact right now we have Conrad Black almost being received as a man of integrity and morals. He is already working for different media venues and he is even challeging the government taking the Order of Canada away from him. This is the kind of atittude we are used to from people like him. Not only are they crooks, they are allowed to make fun of the rest of us who are good citizens, cannot dodge taxes and help move this great country of ours move forward.
I wished these people were paid like royalty! These people make our Queen look low middle class. She only has one power they cannot get no matter what and that is the weight of tradition. In face of what I have seen in the last decades, I became a monarchist. These people at least have some integrity and love for their country.
Here is just a taste of the first chapter of the book when the author is explaining that contrary to general belief, the Canadian financial system did not do much better than everyone else – I quote form the The Thieves of Bay Street by Bruce Livesey – ‘For one thing the Federal Government had bailed out Canada’s banks. In October 2008, Prime Minister Stephen Harper’s Conservative Government created a program to move tens of billions of dollars in assets off the bank’s balance sheets in order to free them up to continue lending. For another thing, overwhelming evidence revea;ed that Canada was actually a premier haven for investment fraud, a country where white-collar criminals face little fear of being caught or seriously punished for their crimes. Over the quarter century leading up to 2012, fewer than twenty Canadian white-collar criminals had actually gone to jail. Yet the damage caused by these crooks and others like them was reflected in the nearly $15 billion worth of losses due to securities fraud that plaintiffs were pursuing in lawsuits during 2010 alone’.
Interesting paragraph. You could easily replace the word Canada with for example Uganda and it would make read like we assume things happen in those parts of the planet where we assume most people are corrupt. Well maybe is time for us to take ourselves off the pedestall and start realizing what is happening in our own country and stop pointing fingers. The so called industrialized world is just the thirld world in tree piece suits whether we like it or not.
Carlos, that was an interesting quote. I’ve watched Mr Harper take credit for “saving” Canada from the global financial meltdown. What he fails to point out is that his predecessors, many of whom were Liberals, passed laws that prevented the banks from engaging in the monkey business that has come to light in the US. That being said, the quote you provided demonstrates that Canada is not immune from this type of behavior. As the investigation into the LIBOR scandal expands, we’ll learn whether the Canadian banks were just as complicit as their colleagues in the UK and the US.
I truly believe that our banks are as bad as the ones in the UK and US. The only difference is that first of all the LIBERALS (not the Conservatives) stopped them from becoming as greed crazy as the ones in the UK adn US and also Canada did the whole collapse with way more class which does not surprise me because we seem to have a spin machine that dwarfs even the US. The Alberta Government alone has a public department of 250. This is a level comparable with Nazi Germany.
Great post however I was wondering if you could write a litte more on this subject?
I’d be very thankful if you could elaborate a little bit further. Kudos!
Thank you Stacey! This situation is unfolding in an interesting way on both sides of the Atlantic. I’ve been thinking about providing an update…your note is all the encouragement I need. It will be posted in the next few weeks.
PS Welcome to the Soapbox.