That Barclays LIBOR-fixing matter......

Bob Diamond, CEO of Barclays, is fighting for his career.

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.
Compliance failings
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.


  1. Is just losing your job after such actions/inactions sufficient redress?

    Frances; you live in a strange world that affects us all, but few understand why or how.

  2. Yes he should be sacked but he, his fellow "fixers" and the political connivance that assisted them to do this, should all face criminal charges. Instead they will continue to give lucrative speeches, receive "honours" and all will be as before.

  3. Guys, whether or not Diamond faces criminal charges depends on whether there is sufficient evidence of criminal behaviour on his part. Previous history suggests that failure of internal control alone is not sufficient to justify criminal charges: it is incompetence or negligence rather than malice. But deliberately misleading shareholders by falsifying key financial data in my opinion is fraud - which is why I said that was the more serious issue. I hope that the Serious Fraud Office sees it that way too.

  4. Diamond has to go, yes. And he will. I really don't see how he can possibly believe otherwise, and the fact that he does seem to be putting his head in the sand is merely another indication of why he has to go.

    What's possibly more interesting, though, is how many of his fellow CEOs will go too. If misreporting and manipulating LIBOR was common across the banking sector at the time - and the evidence seems to be that it was - then if Diamond has to go he's unlikely to be the only one.

  5. One of those emails I believe was sent by one of these traders to his/her manager. In that email, the trader made it clear the pair had had a previous meeting where the trader had objected to the *fixing* being asked of that trader. In the email, the trader made their objection clear for a second time.

    That matters for that particular trader, who clearly felt under duress and was clearly leaving a paper trail for future reference.

    I've no sympathy with the traders. They should have walked out rather than commit fraud at the behest of their bosses. We need to start telling our bosses, whether in banks or in any other industry the magic word of *NO*. Society has a responsibility to ensure such refusers are economically safe when they do refuse to break the law, or rules and we have a duty to ensure those laws exist ie, let's quit with the deregulation ideology.

    Finally, should it be impossible to put this lot on trial, and if those emails were crossing the Atlantic perhaps there is the possibility the crimes used to convict Al Capone could be used here.

    Diamond and the rest of them should not be allowed to resign and walk from this. That is not justice. These people are destroying millions and millions of lives around the world. They must be held accountable. In courts where we are all far more likely to find justice. There is one law, just one. Their riches and power do not, should not immunize them from the law.

  6. One of my concerns in all this is that Mr Diamond will become a sacrificial lamb on behalf of the entire industry. This was a banking-wide conspiracy - it had to be for it to work because of the way LIBOR is calculated.

    Some huffing and puffing from the media, Mr Diamond falls on his sword and the media move on to the next salatious story. If this, and the mis-selling of swaps, doesn't lead to massive changes within banking, starting with the implementation of the Vickers report, now, not in 2018!, then I don't know what the point was. "Man forced to retire to struggle by on £100m fortune and stock options over systematic fraud against basically everyone in the world" isn't enough.

  7. Surely Barclays ought to lose its license until it can prove it has adequate systems and controls in place. Works for motorists. What is the point of a licensing regime if nobody ever gets to lose their license.

  8. Was LIBOR actually manipulated?
    The LIBOR setting process actually disregards half of the submitted rates, so over- or under-calling the true rate means that the submission will not form part of the final calculation.

    It appears to me that there was a huge amount of bravado amongst the traders who actually believed that their requests were being acted upon... and actually changing the rate that was subsequently set.

    Of course, this has provided more ammunition for the politicians to demonise the bankers (let's tax their bonuses... no-one will argue against that!).

    The sad fact is that the banking system in this country is broken - they suck cash out of productive businesses - but simply adding more cost through increased regulation (which they will simply recover from their customers) will not work.

    Cameron and Milliband cannot fix this - but LIBOR fixing is a red-herring.

    1. The full extent of the LIBOR fixing is not yet known, but there is little doubt that other banks were involved. Given that, it seems likely that LIBOR has failed to represent true funding costs for quite a long time.

      Over- or under-calling the true rate of course distorts the final calculation even if the manipulated rate is excluded, because it means that another rate that might have been excluded would be included. Think it through. However, the effect would be small if only one bank were involved - but as I said, that seems very unlikely.

      I don't think more regulation is the answer. I think individuals need to be called to account for their behaviour. The FSA's report makes it clear that EXISTING regulations were flouted.

  9. As you point out, there are two issues - attempted manipulation of LIBOR to profit from market positions, and submitting an understated rate to avoid adverse press comment.

    In relation to the first point, there is much circumstantial evidence of attempted manipulation, but no evidence whatsoever of the manipulation actually succeeding. The graph produced in section 77 being the most obvious example of the lack of impact of one 'rogue' submission.
    Much of the 'evidence' produced suggests that LIBOR was mistated by one or two basis points. Due to the averaging calculation, a one point mistatement moves LIBOR by one-eighth of one basis point.
    Section 96 suggests that a specific EURIBOR fixing was manipulated on 19 March 2007 - with others in the market noticing the "games in EURIBOR today".
    a) Why did the FSA fail to spot those 'games' at the time?
    b)The FSA report should have included details of the size of Barclays postions that matured that day, the movement of the EURIBOR rate at that time and the amount of profit made by Barclays from those positions.

    With regards understating the submission to avoid adverse press coverage - if there was a genuine belief amongst senior management that all other contributors were understating their submissions, what should they have done? Keep their 'heads above the parapet' & get shot to hell?

    Again, the report states that Barclays were having regular 'liquidity calls' with the FSA, Bank of England etc... yet the FSA participants on those calls were unaware of the disconnect between the bank's ability to raise finance on the money marketand the LIBOR rates that they were submitting.

    Section 126 displays the way that the FSA are attempting to avoid criticism.
    Details of Barclays liquidity position was at times being relayed to the FSA on a daily basis - yet the impact of the negative press comment on Barclays, and their response to it was never explored by the FSA.
    At the time of the financial crisis it was THE DUTY of the FSA to review the response of everything that could further damage the liquidity of any of the UK's banks.
    These would have been key discussions - the regulators needed advance warning of any requirements for emergency Bank of England funding, yet the FSA never discussed this with Barclays.... what numpties!

    1. I have already noted that the distortionary effect of LIBOR submission manipulation would be small if only one bank were involved. Your figures prove my point, but you haven't addressed my other point, that it is highly unlikely that this was limited to Barclays.

      I would argue that the low submissions from other banks are indicative of widespread manipulation of LIBOR submissions across the industry. While I understand Barclays' concerns, they were nonetheless wrong to reduce the rates simply to fall in line with other banks.

      I agree with you that the FSA appear to have been asleep on the job, given that they knew banks were experiencing liquidity problems at the time. In fact the FSA's behaviour throughout the financial crisis was ineffective and incompetent, which is of course why they are now being replaced.

    2. The FSA knew that Barclays were understating their submissions - and condoned that action... see section 174:
      "Compliance reported back to senior management on the same day that he had informed the FSA that “we have consistently been the highest (or one of the two highest) rate provider in recent weeks, but we’re justifiably reluctant to go higher given our recent media experience”. He also reported that the FSA “agreed that the approach we’ve been adopting seems sensible in the circumstances, so I suggest we maintain status quo for now”.

      If that discussion did not take place, I am sure that the FSA would state that in the document. If it did take place, then the FSA were complicent in the wrong-doing.

  10. Hi,
    I have a question about the size of the fine imposed on Barclays. How does it compare to
    the increased profits made by their mis-conduct? I am guessing that this is impossible to
    answer accurately but is there a rough guess at how much extra profit Braclays made during the period?


  11. As the more serious LIBOR-fixing understated funding costs during the financial crisis, it is more a question of how much Barclays lost than how much they gained. The point of this "fixing" was to calm media speculation about their financial state and therefore prevent market attack. If they gained anything, it was avoiding a bailout.

    I agree that traders' manipulation may have increased Barclays' profits, but as Anonymous pointed out above, the effect would have been pretty small. Trying to work out what if any additional profit Barclays gained from this would be like trying to unscramble an omelette.

  12. I don't think the Government will do anything about these corrupt Bankers because, a couple of years ago, Directors of a business that about fifty people worked for (including myself), were lied to about the state of that company.

    Then, those unscrupulous Directors simply used holes in Employment law to withhold staff wages and ultimately cheat employees out of the money that they had worked hard to earn ( ).

    Now, despite Employment Tribunals agreeing that staff were treated badly, the High Court tells us that they are powerless to help because of the way that the law has been written.

    But, to rub salt in the wound, the local MP and his Government officials simply dodge the issue by claiming that it is not in the public interest to do anything about this matter, whilst refusing to have the Directors struck off, failing to introduce new laws to outlaw these kinds of sharp practices, and not even bothering to call for an inquiry into this scandal.

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