Rarely a week goes by when the world isn’t told that a financial institution or corporation has committed some illegality or defrauded consumers.
On June 27, it was Barclays Bank Plc’s turn to buckle under, admit guilt for violations concerning the London Interbank Offered Rate (LIBOR) and the Euro Interbank Offered Rate (Euribor), and agree to pay a total penalty of $453 million.
The U.S. Department of Justice (USDOJ) leveled a $160 million penalty against Barclays, the U.S Commodity Futures Trading Commission (CFTC) ordered Barclay’s to pay $200 million, and the Financial Services Authority (FSA, a United Kingdom regulatory agency) fined Barclays 59.5 million pounds (US$93 million).
The $453 million penalty amounted to 7.31 percent of Barclays’s fiscal year-end 2011 consolidated net income after taxes of 3,951 million pounds (US$6.2 billion). According to financial analysts, the total penalty is small considering the severity of the violation.
The fine, when compared to shareholder equity of 65,196 million British pounds (US$102 billion) is a mere 0.44 percent and is considered to be only a slap on the wrist.
“Barclays attempted to manipulate and made false reports concerning two global benchmark interest rates, LIBOR and Euribor, on numerous occasions and sometimes on a daily basis over a four-year period, commencing as early as 2005,” according to a recent statement on the CFTC website.
Tracey McDermott, acting director of enforcement and financial crime at the FSA, said that Barclays’s violations were of significant issue, and that the FSA is looking into other cross-border transactions.
“Barclays’ misconduct was serious, widespread and extended over a number of years. … Making submissions to try to benefit trading positions is wholly unacceptable... Barclays’ behaviour threatened the integrity of the rates with the risk of serious harm to other market participants,” McDermott said in a statement on the FSA website.
Lanny Breuer, Assistant Attorney General at the USDOJ, used strong language in the department’s statement: “LIBOR and Euribor are critically important benchmark interest rates. … The manipulation of submissions used to calculate those rates can have significant negative effects on consumers and financial markets worldwide.”
The news of Barclays’s misdemeanor also affected the company’s stock price. On June 27, the firm’s closing stock price was $12.33. On June 28, the closing stock price had dropped to $10.84, a decrease of $1.49 or 12.08 percent. As of July 11, the closing price of the stock had dipped further to $10.25.
Heads Are Rolling
On July 3, Barclays announced the resignation of Chief Executive Bob Diamond, who served the bank for 16 years.
“No decision over that period was as hard as the one that I make now to stand down as Chief Executive. The external pressure placed on Barclays has reached a level that risks damaging the franchise—I cannot let that happen,” Diamond said in a statement on the Barclays website.
After 15 years at Barclays, Chief Operation Officer (COO) Jerry del Missier resigned, as his name had been prominently linked to the LIBOR scandal. He had held the COO position only since June 22, according to a Barclays’s announcement.
Del Missier had mistakenly assumed Paul Tucker, deputy governor of the Bank of England, had directed Barclays via a phone conversation with Diamond to keep LIBOR at a lower rate. Diamond disagreed.
“Bob Diamond did not believe he received an instruction from Paul Tucker or that he gave an instruction to Jerry del Missier. However Jerry del Missier concluded that an instruction had been passed down from the Bank of England not to keep LIBORs so high and he therefore passed down a direction to that effect to the submitters,” according to a supplementary information release on the Barclays website.
Pointing Fingers
Pointing fingers at its LIBOR panel members, Barclays said, “In the month of October 2008, in particular, Barclays US Dollar LIBOR submissions for the 3 month maturity were the highest or next highest of the panel... Barclays did not understand why other banks were consistently posting lower submissions.”
In fact, Barclays held the strong belief that its fellow panel members didn’t fund at a lower rate than Barclays. Therefore, the bank said, “We were disappointed that no effective action was taken, notwithstanding our having raised these issues with various Authorities.”
On July 4, the U.K. Treasury Select Committee questioned Diamond about the penalties Barclays incurred. Andrew Tyrie MP, chairman of the committee, stated that Barclays was not the only bank involved in the LIBOR scandal, and that the scandal has tarnished the financial sector to a degree not seen before.
The LIBOR interest rate “was systematically rigged over a period of years. It appears that many banks were involved and Barclays were the first to own up. This is the most damaging scam I can recall,” according to Tyrie’s comments on the U.K. Parliament website.
Also, Diamond told the Select Committee that Barclays did not act alone, but that British and American regulators based in London and Washington D.C., respectively, also shoulder responsibility when it comes to the LIBOR manipulation scandal.
Lawsuits Coming out of the Woodwork
“I am not sure that investors recognize the impact this investigation is going to have on all the banks involved. Citigroup (C), Bank of America, JP Morgan (JPM), UBS, Royal Bank of Canada, and Lloyds Banking Group have already started getting sued in the U.S. and abroad,” according to a recent article on the Seeking Alpha website.
Even in the midst of the LIBOR investigation and before Barclays agreed to pay a fine, the Lieff, Cabraser, Heimann & Bernstein law firm filed a lawsuit on behalf of Charles Schwab Corp. and affiliates against 11 banks, among them Barclays Bank PLC, Bank of America Corp., and Citigroup Inc., for manipulation of the LIBOR rate.
Lawsuit experts suggest that banks are already trying to have class action lawsuits concerning the LIBOR manipulation dismissed, but most likely won’t be successful.
“These LIBOR lawsuits present a particular challenge for the banks because it is going to be extremely difficult for them to argue the facts. Each individual bank’s settlement with government authorities is going to require them to admit wrongdoing,” according to the Seeking Alpha article.
Grasping the Fundamentals of LIBOR and Euribor
The interest rate based on LIBOR is the most prevalent tool used by financial institutions to calculate interest rates when making local and foreign government and corporate loans. LIBOR is the one-month, three-month, six-month, and one-year interbank interest rate, that is, the cost of borrowing from another bank. In economic terms, this rate is the market price for banks when borrowing among one another.
The rates are calculated by several groups, called panels, composed of between 8 and 16 members selected from a number of the largest banks, including Barclays Bank PLC, Bank of America Corp., Citigroup Inc., Standard Chartered Bank, and Deutsche Bank AG.
“Euribor, which is calculated in a similar fashion by the European Banking Federation (EBF), is another globally important rate that measures the cost of borrowing in the Economic and Monetary Union of the European Union,” according to the CFTS statement.
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