Big Banks Have Criminally Conspired Since 2005 to Rig $800 Trillion Dollar Market
George Washington Blog
We noted Friday: Barclays and other large banks - including Citigroup, HSBC, J.P. Morgan Chase, Lloyds, Bank of America, UBS, Royal Bank of Scotland- manipulated the world's primary interest rate (Libor) which virtually every adjustable-rate investment globally is pegged to.
That means they manipulated a good chunk of the world economy.
We actually understated the impact of the Libor scandal.
Specifically, more than $800 trillion dollars worth of investments are pegged to the Libor rate. As the Wall Street Journal reports today:
More than $800 trillion in securities and loans are linked to the Libor, including $350 trillion in swaps and $10 trillion in loans.
Barclays's Agius Is Stepping Down
By SARA SCHAEFER MUÑOZ
LONDON-The chairman of Barclays PLC, Marcus Agius, will step down amid fallout from the bank's $453 million settlement of an interest-rate manipulation probe, according to three people close to the bank.
Barclays said it will pay $453.6 million to settle a long-running probe by U.S. and U.K. regulators into allegations that traders manipulated interbank lending rates. Explore the bank's settlement with the U.K.'s FSA.
Political and investor pressure has mounted on the management of U.K.-based Barclays since the settlement was announced Wednesday. The announcement of Mr. Agius's departure could come as soon as Monday, said one of the people.
Mr. Agius, 65 years old, a British-Maltese banker who formerly worked at Lazard Ltd., has led the bank since 2007, steering Barclays through the 2008 financial crisis and avoiding the direct state bailouts that were needed by many of its global peers.
But Barclays has faced a number of problems more recently, including a sweeping investigation by U.S., U.K. and Asian authorities of several global banks into alleged wrongdoing in the interest-rate-setting process that influences a benchmark lending rate, the London Interbank Offered Rate, or Libor.
Barclays was the first among a group of global banks being investigated to reach a settlement. No banks or individuals have been charged with wrongdoing.
Banks that have disclosed they are being investigated include Citigroup Inc., Deutsche Bank AG, HSBC Holdings PLC, J.P. Morgan Chase & Co. and Royal Bank of Scotland Group PLC. Swiss bank UBS AG has said it has been granted partial immunity by certain regulators, including the Justice Department, in return for cooperating with the probe.
In the settlement with the U.K.'s Financial Services Authority, the U.S. Commodity Futures Trading Commission and the U.S. Department of Justice's fraud section, Barclays admitted that executives and traders tried to manipulate this interest rate. Libor: What You Need to Know
What it is: Libor - or the London interbank offered rate benchmark - is supposed to measure the interest rates at which banks borrow from each other. It is based on data reported daily by a 16-bank panel. Other interest rate indexes, like the Euribor (Euro interbank offered rate) and the Tibor (Tokyo interbank offered rate), function in a similar way.
Why it's important: More than $800 trillion in securities and loans are linked to the Libor, including $350 trillion in swaps and $10 trillion in loans, including auto and home loans, according to the CFTC. Even small movements - or inaccuracies - in the Libor affect investment returns and borrowing costs, for individuals, companies and professional investors.
How Libor Is Set
By 11:10 a.m. London time, the banks on the Libor panels submit to Thomson Reuters, as an agent for the British Bankers' Association, their estimated borrowing rates. Thomson Reuters discards the highest and lowest submissions. The remaining 50% of the submitted quotes are averaged to work out the Libor rate. By about 11:30 a.m. London time, Libor rates are published.
Libor rates are calculated for different currencies each day under the auspices of the British Bankers' Association using quotes submitted by banks on a panel, based on the banks' estimated borrowing costs. More than $800 trillion in securities and loans are linked to the Libor, including $350 trillion in swaps and $10 trillion in loans, including auto and home loans, according to the CFTC. Even small movements-or inaccuracies- in Libor affect investment returns and borrowing costs, for individuals, companies and professional investors.
The settlement comes as investors in recent quarters have become displeased with the bank's high pay for its executives and its low returns, especially after an ambitious effort to expand its investment bank fell short of expectations. Along with other U.K. banks, it has been involved in the widespread mis-selling of payment-protection insurance.
The bank also has been accused by U.K. authorities of avoiding tax, a misdemeanour that could cost it £500 million ($785.2 million). Barclays said it hasn't done anything wrong.
In addition to likely costing Mr. Agius his job, the Libor settlement put the bank's chief executive, Robert Diamond, in the spotlight, with speculation last week that the scandal could force him to be the one to step down. But Mr. Diamond, 60, appears to have dodged that bullet.
Mr. Diamond and other top executives met last week with Barclays board, and agreed to forgo their multi-million pound bonuses in hopes of blunting criticism of the bank's actions.
But the bonus sacrifice didn't satisfy politicians and some shareholders, and Prime Minister David Cameron vowed to launch an independent investigation on how the rate is set.
"It's very important [the review] takes all of the actions necessary, holding bankers accountable... making sure there's proper transparency, making sure the criminal law can go wherever it needs to uncover wrongdoing," he told BBC television Saturday.
Labour opposition leader Ed Miliband called for a criminal prosecution relating to the attempted rate-manipulation, and Mr. Diamond will appear before a Parliamentary panel to answer questions.
Mr. Agius is at the center of the Libor scandal, acting as both chairman of Barclays and the BBA, the trade body the oversees the benchmark.
He has been a divisive figure at the BBA, clashing with Chief Executive Angela Knight, according to people familiar with the matter. Ms. Knight has been pushing for the government to have a greater oversight of the benchmark, but has faced internal resistance, these people say.
The U.K. government, along with the Financial Services Authority and the Bank of England, has been reviewing the regulation and supervision of Libor since March of this year.
Business Secretary Vince Cable said there should also be a criminal investigation into the Libor-fixing scandal.
"[The public] just can't understand why people are thrown into jail for petty theft and these guys just walk away having perpetrated what looks like conspiracy," Mr. Cable told Sky television Sunday.
Bank of England Gov. Mervyn King on Friday called for the current system for calculating Libor to be scrapped.
Mr. King said the process of using quotes to calculate Libor should be replaced with a system in which actual transaction prices are used instead. "The idea that my word is my Libor is dead," he said.
In the settlement agreement, the CFTC said there were two areas of unlawful conduct by Barclays. The first concerned senior management, the regulator said. In late 2007, as banks came under pressure in the early rumblings of the financial crisis, Barclays managers didn't want the bank to be seen to be paying high rates to borrow, it said. After discussions "among high levels of management" within the bank, an order was sent to keep Barclays' submissions to U.S. dollar Libor at an artificially low level, the CFTC said.
"Barclays Libor submitters were told not to submit [quotes for U.S. Libor] at levels where Barclays was 'sticking its head above the parapet,'" the CFTC said. "Multiple" senior managers at the bank were involved, according to a CFTC official. People familiar with the matter say the majority of Barclays employees involved in the alleged manipulation have left the bank.
The CFTC also said Barclays traders in New York, London and Tokyo attempted to manipulate Libor to help their derivatives trading positions. Traders made unlawful requests to the bank's rate submitters "routinely, and sometimes daily" from at least mid-2005 to at least the fall of 2007, the CFTC said. The requests were frequently accepted by the bank's rate submitters, according to the CFTC. It quoted emails such as "always happy to help" and "Done...for you big boy." -Peter Evans contributed to this article.
A version of this article appeared July 2, 2012, on page C1 in the U.S. edition of The Wall Street Journal, with the headline: Barclays Fallout Hits Chairman.
Remember, the derivatives market is approximately $1,200 trillion dollars. Interest rate derivatives comprise the lion's share of all derivatives, and could blow up and take down the entire financial system.
The largest interest rate derivatives sellers include Barclays, Deutsche Bank, Goldman and JP Morgan ... many of which are being exposed for manipulating Libor.
They have been manipulating Libor on a daily basis since 2005.
They are still part of the group of banks which sets Libor every day, and none have been criminally prosecuted.
They have received a light slap on the wrist from regulators, which - as nobel economist Joe Stiglitz points out - is just the cost of doing business when fraud is the business model.
Indeed - as Bloomberg notes - they're probably still manipulating the rate:
The U.K. bankers and regulators charged with reviewing Libor in the wake of regulatory probes are resisting calls to overhaul the rate because structural changes risk invalidating trillions of dollars of contracts.
The group, established by the British Bankers' Association in March after probes into allegations that traders rigged the London interbank offered rate ... won't propose structural changes such as basing the rate on actual trades or taking away oversight of the benchmark from the BBA, the people said.
Libor is determined by a daily poll that asks banks to estimate how much it would cost them to borrow from each other for different timeframes and in different currencies. Because banks' submissions aren't based on real trades, academics and lawyers say they are open to manipulation by traders. At least a dozen firms are being probed by regulators worldwide for colluding to rig the rate, the benchmark for $350 trillion of securities.
"I don't see a significant enhancement to the reputation of Libor without basing it on actual transactions," said Rosa Abrantes-Metz, an economist with Global Economics Group, a New York-based consultancy, an associate professor with New YorkUniversity's Stern School of Business and the co-author of a 2008 paper entitled "Libor Manipulation?" [Shah Gilani also warned of Libor manipulation in 2008, and Tyler Durden, Max Keiser and others started sounding the alarm at or around the same time.]
"It would only be disruptive if current quotes are inaccurate," so resistance "is suspicious," she said.
Traders interviewed by Bloomberg in March at three firms said they were given no guidance on how Libor should be set and there were no so-called Chinese walls preventing contact between the treasury staff charged with submitting the rate and traders who stood to profit on where Libor was set each day. They regularly discussed where Libor would be set with their colleagues and their counterparts at other firms, they said.
"Sadly the response looks to be very consistent with the response of policy makers to the banking disasters we've seen over the last four years - cosmetic changes, but nothing substantial happens," said Richard Werner, a finance professor at the University of Southampton. "It's insufficient and doesn't really go to the heart of the problem."