Barclays and Libor - more than just 'rouge traders'.

I was surprised yesterday that on its main news bulletins a reporter for BBC News seemed to support the 'rouge traders' narrative, when she said something along the lines that Barclays' traders had manipulated the Libor rate for 'personal gain'. Can't remember her name and quite frankly if that is the best she can do, can't be bothered either.

Now whilst this may have been true for the first tranche, it fails to mention what happened in the second tranche of manipulating the Libor rates.

This below is an extract from findings of the U.S.A Commodity Futures Trading Commission (CFTC) where they allege:

During the financial crisis period, Barclays believed that the market and media inaccurately perceived Barclays as having liquidity problems in part because the rates submitted for LIBOR by Barclays were significantly higher at times than the rates submitted by other banks. Barclays contended the other banks' submissions were inappropriately low given the realities ofthe market conditions and lack of transactions occurring in the interbank markets. To manage public perceptions that its higher LIBOR submissions meant Barclays was a weaker institution, Barclays' senior management directed the Barclays submitters to lower Barclays submissions in order to be closer to the rates submitted by the other bank, and thus, be a less noticeable outlier from the rest of the banks. The Barclays submitters complied with the management directive by submitting artificially lower rates than they would have otherwise submitted and that were inconsistent with the definition and criteria for submitting LIBOR. As a result, Barclays did not submit rates reflecting or relating to borrowing of unsecured funds in the relevant interbank markets.

I should point that as part of the offer agreement to settle, Barclays did so "Without admitting or denying the findings or conclusions [of CFTC Order]..., except to the extent Respondents admit those findings in any related action against Barclays by, or any agreement with, the Department of Justice or any other governmental agency or office,....."

You can download the full transcript from CFTC website. (in pdf format)



Note: All words in italics are from the CFTC Order.

Libor - This is far bigger than Bob Diamond alone.

Today British politicians are falling over each other in a blame game of whom is responsible for the Libor (London interbank offered rate) fiasco. But surely they themselves cant completely escape blame either, as someone asked is this the banks 'Leveson' moment, did politicians and bankers become too close? - was it a case of you scratch my back and I'll scratch yours (or was that F1 I'm thinking about). Should we now have  a 'Leveson' type inquiry into this whole mess?

After all questions about Libor have been around for some time.

Back in May 2008, The Wall Street Journal cast doubt on the Libor rate - The following is an extract from The Wall Street Journal Article -  Study Casts Doubt on Key Rate.

Major banks are contributing to the erratic behavior of a crucial global lending benchmark, a Wall Street Journal analysis shows.

The Journal analysis indicates that Citigroup Inc., WestLB, HBOS PLC, J.P. Morgan Chase & Co. and UBS AG are among the banks that have been reporting significantly lower borrowing costs for the London interbank offered rate, or Libor, than what another market measure suggests they should be. Those five banks are members of a 16-bank panel that reports rates used to calculate Libor in dollars.

And an entry was added to the Libor Wikipedia page about the above study in September 2008, as well as the following:

To further bring this case to light, The Wall Street Journal released another article dealing with this matter titled "U.S. Probe Presents Dilemma over Libor" on Friday, March 18, 2011. The article stated that regulators are focusing on Bank of America Corp., Citi-group Inc. and UBS AG. Making a case would be very difficult because determining the Libor rate does not occur on an open exchange. According to people familiar with the situation, subpoenas have been issued to the three banks.

In response to the study released by the WSJ, the British Bankers' Association announced that Libor continues to be reliable even in times of financial crisis. According to the British Bankers' Association, other proxies for financial health, such as the default-credit-insurance market, are not necessarily more sound than Libor at times of financial crisis, though they are more widely used in Latin America, especially the Ecuadorian and Bolivian markets.

Libor serves as a benchmark for around $350 trillion of financial instruments around the world. Libor is set daily by Thomson Reuters in a process overseen by the British Bankers' Association.

A recent article in The Wall Street Journal - Interest Rate Probe Escalates says:

In its filing, the U.S. Commodity Futures Trading Commission (CFTC) alleged that a senior manager at Barclays warned the bankers' association in a phone call in 2008 that the bank hadn't been submitting accurate Libor rates, while claiming it was not the worst offender on the panel.

"We're clean, but we're dirty-clean, rather than clean-clean," the CFTC said that the Barclays employee stated. It added that the bankers' association representative responded: "No one's clean-clean."

A spokesman for the association said Wednesday that the group wasn't aware of the events described by the CFTC and would "conduct a full inquiry into this."

As you can see and read elsewhere, this is far bigger than Bod Diamond alone.

See also: Zero Hedge - British Bankers Association Is "Shocked"

To view  WSJ LIBOR: Historical Data

RBS to be nationalised?

It hard to know what to make of the news these days, one thing for certain its about to get much worse, as the world seems to be heading towards recession.

This morning Moody's Investors Service downgraded the senior debt and deposit ratings of 12 UK financial institutions and confirmed the ratings of one institution.

The Chancellor, Mr Osborne said [to the BBC] he was confident that British banks were well-capitalised. "They are not experiencing the kinds of problems that some of the banks in the eurozone are experiencing at the moment."

However in his blog, Robert Peston, BBC Business editor says:

If the minimum stressed capital ratio were set at 8%, Royal Bank of Scotland, Barclays and Lloyds would all be forced to raise new capital.

Among the British banks Royal Bank of Scotland is most vulnerable to being forced to raise new capital, because under July's health checks its stressed capital ratio emerged relatively low at 6.3% (compared with 7.3% for Barclays, 7.7% for Lloyds and 8.5% for HSBC).

So if the new minimum capital bar were set at 7% (and we have no idea where it will ultimately be set) RBS would seem to need to raise a few billions of additional capital.....

.....I would therefore expect the chancellor to argue pretty strongly to his eurozone counterparts that RBS has quite enough capital for now.

And if he were to lose this battle, he might well be better off launching a takeover bid to acquire all of RBS - to nationalise it fully - than recapitalising the bank through an exercise of the existing rescue mechanism.