Counterparties: Barclays’ $450 million LIBOR settlement

By Ben Walsh
June 27, 2012

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It’s always the emails:

“always happy to help,”…“Done…for you big boy,”

“Dude. I owe you big time! Come over one day after work and I’m opening a bottle of Bollinger”.

Those are the thanks sent to Barclays employees for manipulating key interest rates. The gloating, conspiratorial tone is in full public view now that the bank has settled charges with the CFTC, the Department of Justice and the FSA that it manipulated Libor and Euribor for just over $450 million. CEO Bob Diamond promptly apologized in a written statement, and he and three other top execs will forgo bonuses this year. Breakingviews’ George Hay notes that the scandal confirms the worst of the public’s view of banks and thinks that the “full costs of the affair for Diamond and Barclays will be more than just financial”.

The benchmarks in question represent the rate at which banks in Europe lend to one another. They’re calculated based on banks’ responses to surveys on current market interest rates (the full explanation is available here). The settlement documents show that Barclays submitted inappropriately low rates, aiming to keep Libor and Euribor artificially low. Sober Look has a great chart showing an example of just how off the mark Barclays’ rates were:

The importance of Libor and, to a lesser extent, Euribor, is hard to overstate. They are used to value of hundreds of trillions of dollars of financial instruments. Or as Matt Levine puts it, they “set the rates on pretty much all the loans and swaps in the world … CFTC order mentions $350 trillion of [over-the-counter] swaps, $10 trillion of loans, and $437 trillion of CME eurodollar contracts indexed to Libor alone”.

In that context, it’s fair to ask what’s $450 million compared with a scheme like that? Not much, proportionally. And Barclays won’t face criminal prosecutions, because of what the DOJ calls its “extraordinary cooperation”. Individual employees, though, are the subject of ongoing criminal investigation. – Ben Walsh

On to today’s links:

EU Mess
Former Spanish central bankers thought Spain would be just fine – NYT
Dalio: Germany might not save Europe – Zero Hedge
Full text: The EU’s latest proposal for a closer monetary union – European Union
Merkel will not accept debt sharing without increased budget control – Reuters

TBTF
Reverse synergy: Too-big-to-fail banks are currently worth less than the sum of their parts – Bloomberg

Contrarian
Why shareholders don’t actually own public companies and are hurting America – Jesse Eisinger

Crisis Retro
The market for “safe”, tax-exempt real estate-backed bonds is booming in Brazil – Brazilian Bubble

Takedowns
“Fiscal policy something something”: Central banks’ latest lame excuses – Economist

Scary
The IMF’s fully updated database of 147 banking crises – IMF

New Normal
How five terrible years for young workers could affect the election – Businessweek

Oxpeckers
WSJ intern fired for fabricating sources – Politico

RIP
Nora Ephron is dead at 71 – NYT

Comments
6 comments so far

Felix, While I love your blog, you consistently repeat the myth that managers of publicly traded companies are obligated to maximize profits. Please read http://counterparties.com/t/contrarian that Ben has linked to, so you can stop perpetuating that nonsense.

As for the WSJ intern fired for fabricating sources, he probably didn’t realize the WSJ isn’t part of Fox news yet.

Posted by KenG_CA | Report as abusive

Apparently this is the fourth time in two years Bob Diamond has had to apologise for the actions of his bank. But Barclays may not be the only ones involved… 16 banks input data to decide the LIBOR rate; the lowest four and the highest four are ignored, and the remaining ‘middle eight’ are averaged out. That means for a manipulation to be effective, it needs to have been carried out by at least five different players.

Robert Peston on the BBC mentioned the names of five other banks said to be involved, so I wait with baited breath.

Posted by FifthDecade | Report as abusive

Everything necessary to RICO-prosecute the entire top-tier of finance, and all its individual big-swinging-dicks on both sides of the pond, has already been pleaded to by the industry. There’s nothing left that needs to be proven – it’s all in the record now.

The will to prosecute is the the only missing ingredient. That’s why The Street HAS to own DC.

It’s not just the US either – check this -
http://www.economist.com/blogs/schumpete r/2012/06/investment-banking-and-politic s

Posted by MrRFox | Report as abusive

Without going into the merits and demerits of a case that i have vey little knowledge, i want to just comment on the emails that you hightlighted

i have written tons of emails like the one above whenever i have received help from a colleague. To be truthful, i write messages like that to support teams or someone help me crack a difficult situation

the messages by themselves don’t mean that something wrong was done. it just implies that people are thanking each other for services/help rendered

did i read the situation correctly?

Posted by InfiniteThought | Report as abusive

“did i read the situation correctly?” (Infinite T)

Umm … No. They’re haven’t rolled-over and agreed to plead and pay all that money because they are innocent. Barclays’ is no kind of ‘victim’ in this case, IT.

Posted by MrRFox | Report as abusive

IT, the problem is simply that those people were not allowed to talk to each other (Chinese Walls) and were thanking each other for manipulating LIBOR rates, which has been described as conspiracy to defraud. The tendrils reach the very top too as current CEO Diamond was in charge of the department that showed such blatant disregard for the rules…

Posted by FifthDecade | Report as abusive
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