The extent of the LIBOR-fixing scandal for which Barclays was fined by the FSA on the 27th June is still unclear: many other banks are thought to be involved - probably all of the LIBOR panel banks. Barclays was the first to admit guilt, and its fine was reduced by 30% because of this. However, the media furore since has cost Barclays far more than that: its share price dropped by over 15% after the FSA announced its findings, and there have been persistent calls for Diamond to resign. He has now been "invited" to appear before the Treasury Select Committee to explain Barclays' behaviour.
Both Diamond's acceptance letter and the FSA report identify two quite separate and distinct forms of LIBOR-fixing. The first is the more widely reported, since it concerns the behaviour of traders - who everyone loves to hate anyway - and there are some salacious emails providing evidence of traders influencing LIBOR submitters with promises of champagne. The emails provide excellent colour for journalists and they do suggest that influencing LIBOR submitters was normal practice for traders even though it is a flagrant breach of Chinese walls. But the second, which is less glamorous, is far more serious, since it amounts to a bank attempting to deceive investors by manipulating market data. That is fraud.
The relevant sections of the FSA report are very clear.
Here's issue number 1. As expected - and as Diamond identified in his acceptance letter to the Treasury Select Committee - it concerns traders:
Inappropriate submissions following requests by derivatives traders
8. Barclays acted inappropriately and breached Principle 5 on numerous occasions between January 2005 and July 2008 by making US dollar LIBOR and EURIBOR submissions which took into account requests made by its interest rate derivatives traders (“Derivatives Traders”). At times these included requests made on behalf of derivatives traders at other banks. The Derivatives Traders were motivated by profit and sought to benefit Barclays’ trading positions.
..............10. Barclays also breached Principle 5 on numerous occasions between February 2006 and October 2007 by seeking to influence the EURIBOR (and to a much lesser extent the US dollar LIBOR) submissions of other banks contributing to the rate setting process.I shall be interested to hear how the other banks responded to Barclays' traders attempting to talk down (or up) their LIBOR submissions. I suspect that like the Barclays' LIBOR submitters, they were only too pleased to help.
Diamond, in his acceptance letter, distances himself from the activities of these traders and blames the desk supervisors. On the face of it this seems reasonable, since even though he was head of Barclays Capital at the time he couldn't really be expected to know everything that traders get up to. But there is a much bigger issue here which is identified further down in the FSA report. I shall return to it later on.
Now to issue number 2. It has nothing to do with traders.
Inappropriate submissions to avoid negative media comment
12. Barclays acted inappropriately and breached Principle 5 on numerous occasions between September 2007 and May 2009 by making LIBOR submissions which took into account concerns over the negative media perception of Barclays’ LIBOR submissions.
13. Liquidity issues were a particular focus for Barclays and other banks during the financial crisis and banks’ LIBOR submissions were seen by some commentators as a measure of their ability to raise funds. Barclays was identified in the media as having higher LIBOR submissions than other contributing banks at the outset of the financial crisis. Barclays believed that other banks were making LIBOR submissions that were too low and did not reflect market conditions. The media questioned whether Barclays’ submissions indicated that it had a liquidity problem. Senior management at high levels within Barclays expressed concerns over this negative publicity.
14. Senior management’s concerns in turn resulted in instructions being given by less senior managers at Barclays to reduce LIBOR submissions in order to avoid negative media comment. The origin of these instructions is unclear. Barclays’ LIBOR submissions continued to be high relative to other contributing banks’ submissions during the financial crisis.Couldn't be clearer, really. During the financial crisis, senior Barclays management deliberately falsified LIBOR submissions in order to make their funding costs look lower than they were and therefore fool investors into believing that the bank was in better shape than it actually was. Nothing whatsoever to do with traders breaching Chinese walls.
Diamond obviously realised that he couldn't get away with blaming traders for this, so in his letter he focuses on the other banks alluded to in paragraph 13. Actually he has a point, and I think we will discover soon that other banks were also making submissions that were far too low in order to make themselves look stronger than they were. I am particularly interested in the findings regarding RBS and UBS, both of which were bailed out in the financial crisis.....either the market massively misread their creditworthiness at the time, or they lied about their funding costs. But that doesn't excuse Barclays' behaviour. Quite apart from the market effect of deliberately quoting lower rates than those they were actually paying, they also lied about their funding costs in order to deceive investors and the public at large. That is unacceptable. And although Diamond was not CEO at the time, he was the head of Barclays Capital and a member of the senior management team at Barclays.
Now to return to the real issue underlying issue no.1. Here is the FSA again:
Systems and controls failings
15. Barclays breached Principle 3 from January 2005 until June 2010 (the “Relevant Period”) by failing to have adequate risk management systems or effective controls in place in relation to its LIBOR and EURIBOR submissions processes. Barclays had no specific systems and controls in place relating to its LIBOR and EURIBOR submissions processes until December 2009 (when Barclays started to improve its systems and controls).
16. The extent of Barclays’ misconduct was exacerbated by these inadequate systems and controls. Barclays failed, at a number of appropriate points during the Relevant Period, to review whether its systems and controls were adequate.
17. Barclays failed to conduct its business with due skill, care and diligence when considering issues raised internally in relation to its LIBOR submissions. Barclays therefore breached Principle 2. LIBOR issues were escalated to Barclays’ 4 Investment Banking compliance function (“Compliance”) on three occasions during 2007 and 2008. In each case Compliance failed to assess and address the issues effectively.
18. Compliance’s failures meant that Barclays’ breaches of Principles 5 and 3 were allowed to continue. Compliance’s failures also led to unclear and insufficient communication about issues to the FSA.So traders weren't breaching Chinese walls, actually. The Chinese walls WERE NEVER THERE. Barclays had no means of ensuring that its LIBOR submission process was safeguarded from inappropriate influence from other areas of the business. And it didn't care.
This is a major failure of internal control akin to those we see in virtually all "rogue trader" events. And Diamond is in fact treating this as a "rogue trader" event. The junior staff actually involved in the rate fixing are being sacked. But the senior management responsible for the internal control failure that made it possible for these people to influence rates inappropriately, are they being sacked too? Doesn't look like it. After all, the person heading up Barclays Capital during the period in question was one Bob Diamond - and he is clearly hoping to hang on to his job, as his pre-emptive repudiation of his bonus shows.
It won't do, and I hope the Treasury Select Committee see through this smokescreen. Bob Diamond is culpable for BOTH parts of the LIBOR-fixing scandal at Barclays. He should be sacked.