Counterparties: Barclays’ $450 million LIBOR settlement

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

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

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

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

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

WSJ intern fired for fabricating sources – Politico

Nora Ephron is dead at 71 – NYT


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