Barclays’ first-mover disadvantage

By Felix Salmon
July 6, 2012

Barclays is to Liebor as Goldman is to structuring dodgy synthetic CDOs: not the worst offender, necessarily, but the first to hit the headlines.

The Economist has a good overview:

Almost all the banks in the LIBOR panels were submitting rates that may have been 30-40 basis points too low on average…

Among banks regularly submitting much lower borrowing costs than Barclays were banks that subsequently lost the confidence of markets and had to be bailed out. In Britain these included Royal Bank of Scotland (RBS) and HBOS.

Regulators around the world have woken up, however belatedly, to the possibility that these vital markets may have been rigged by a large number of banks. The list of institutions that have said they are either co-operating with investigations or being questioned includes many of the world’s biggest banks. Among those that have disclosed their involvement are Citigroup, Deutsche Bank, HSBC, JPMorgan Chase, RBS and UBS.

Court documents filed by Canada’s Competition Bureau have also aired allegations by traders at one unnamed bank, which has applied for immunity, that it had tried to influence some LIBOR rates in co-operation with some employees of Citigroup, Deutsche Bank, HSBC, ICAP, JPMorgan Chase and RBS.

And here’s Jonathan Weil:

What’s truly depressing is the thought that Barclays is only the first bank to settle with regulators over the Libor affair. Eventually, when others reach their own accords, similar inquiries will be made of their top officers.

David Merkel has a fascinating analysis of what the various different banks did, and he reckons there was a “tug of war” between two groups of banks. One group, including Barclays along with BTMU, Credit Suisse, HBOS, Norinchuckin, and RBS, was putting in high bids to raise Libor; another group, which included Citi, HSBC, JP Morgan, Lloyds, and Rabobank, was putting in low bids to bring Libor down. But of course given the almost complete absence of interbank lending during the crisis, it’s not entirely obvious whether there was even a “real” interbank offered rate at all.

In any case, when the other shoe drops, the headlines are going to be smaller: this kind of activity is never as shocking the second time around. Look at what happened to Citigroup, which was actually more evil than Goldman when it put together the Class V Funding III CDO. (The profits from Goldman’s Abacus deal went mostly to John Paulson; the profits from the Citi deal went straight to Citi.) Citi settled the case for $285 million — less than Goldman paid — and suffered almost none of the PR backlash that was inflicted on Goldman.

The truth is that Barclays is being hammered here, and its CEO has lost his job, not because Barclays was worse than anybody else, but rather because its employees were stupid enough to leave a written record, in emails, of exactly what they were doing. Similarly with Goldman: it was those emails from “Fab” Fabrice Tourre that really did for the bank. And so it goes, back through Henry Blodget and further. It’s not the act which matters, it’s the contemporaneous documentation thereof.

There will be many very large settlements to come, of course, both directly with regulators and also with clients who can claim to have lost money as a result of the manipulation. But banks can afford large settlements. What they hate is bad PR, and plunging share prices. And every single bank which isn’t Barclays is breathing a massive sigh of relief right now, and thinking “there but for the grace of god”.

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