Why the Barclays Libor scandal was straight-forward fraud


by Left Outside    
9:10 am - July 5th 2012

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As far is my understanding, there were two periods of Libor fixing at Barclay and elsewhere; one prior to 2008 which involved manipulating Libor to boost trading profits indirectly and a second after 2008 where they manipulated Libor to prevent themselves going under.

First of all, disclaimer for Barclays, “they” were all at it, Barclays were just the most thorough in their investigations and the quickest in settling with various regulators. Bob Diamond’s ire is somewhat justified for that.

What Bob Diamond is not justified in doing is conflating the two sorts of Libor fixes in which banks were involved.

Briefly, Libor is the London InterBank Offered Rate, this is the average rate at which banks think they will be able to borrow large amounts of money from each other. An individual bank reporting a high Libor individually will raise doubts about its solvency. Trillions of pounds of financial products us the Libor rate as a benchmark rate for their pricing. Manipulating it even a tiny fraction hence has potentially huge ramifications.

As always in banking you have to pay attention. Prior to 2008, in the boom years, Barclays would very occasionally over-reported the rate at which they expected to be able to borrow, so it would push up the profits of their trading division. After 2008 Barclays under-reported the rate at which they expected to be able to borrow because it could have caused them to collapse.

After 2008 banks stopped lending to one another and Libor rates became a little esoteric, it was “the rate at which banks did not lend to each other.”

In this period risk was mispriced but with the purpose of helping Barclays and the whole global financial system survive. This I feel is much more acceptable, and even regulatory forbearance of this fraud may be worthwhile given how damaging financial crises are.

What occurred before 2008 however was just awful. But what has to be clear is that this isn’t down to individuals, when you have simultaneous actions across a system you should blame the system. But before 2008 it was out and out fraud and there should be criminal proceedings. After all, we live in a country where you can go to jail for stealing £3.50 worth of water.

In both cases a transfer was involved because risk was being mis-priced, but after 2008 there was some public policy justification for doing so. Bob Diamond appears to be using this justification to defend the earlier practices and that I am unimpressed by.

This isn’t a case of bad apples – they were all doing it. The banking culture and system is broken and recruits for and promotes slightly psychopathic tendencies, we shouldn’t act surprised. But angry, I think acting angry is justified.

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About the author
Left Outside is a regular contributor to LC. He blogs here and tweets here. From October 2010 to September 2012 he is reading for an MSc in Global History at the London School of Economics and will be one of those metropolitan elite you read so much about.
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Reader comments


You’re right about the way Diamond is attempting to conflate the two kinds of manipulation, but not quite right about the details of the pre-2008 one.

The activity pre-2008 involved traders leaning on the people setting the rate (not solely in Barclays, but also their friends in other banks) to fix it one way or another to benefit their personal trades. This wouldn’t necessarily be in the bank’s interests, as it has hundreds of traders taking positions that relate to LIBOR all the time, and the rigging benefits solely the trade that the individual trader is making.

(also, I’m not convinced that “the system handed out evil and draconian punishments after the riots in order to appease angry dickheads and make a public declaration that the state would be used to crush any future dissent” is much of an argument for anything, other than the system being run by arseholes…)

2. Shrugged...

I agree. Let’s get rid of the central banks and the whole problem disappears.

3. Bitter & Twisted

…recruits for and promotes slightly psychopathic tendencies…

The psychopathic tendancies and behaviour of bankers aren’t “slight” in the sense that they are less than those of the mad axeman type, but are rather “socialized” in the sense that this type of psychopath has worked out how to express their socially unacceptable drives in a more socially acceptable way – there is a difference.

Can we please have some arrests now?

In this period risk was mispriced but with the purpose of helping Barclays and the whole global financial system survive. This I feel is much more acceptable, and even regulatory forbearance of this fraud may be worthwhile given how damaging financial crises are.

Ah. So you’re making a case for state corporatism- that we are all better off if we permit governments and large corporations to fix markets. That, ultimately, what is good for them will probably be good for us.

Can’t you see that it is this attitude that is the problem? The banks should have been made to fail if that is what the markets dictated should happen.

I said the other day that anyone caught fixing markets, whatever their motive, deserves the red hot poker and that applies to anyone whose fingerprints are found at the scene of the crime- Brown, Balls, Darling whoever.

A couple of problems with the article:

Firstly, LIBOR is a fixing…it is where banks “think” they can borrow, and not actually where they can. LIBOR itself isn’t a traded instrument, so it’s going to be very hard for anyone to prove beyond reasonable doubt that the trader setting LIBOR at an individual bank isn’t doing it because the bank really needs cash, rather than actually manipulating the fix (except in the cases where there is some kind of incriminating email trail). Indeed, by the very nature of the way the banks and their treasury books + hedges work, it is normally in a banks best interests to push LIBOR higher when they need cash and reduce it when they don’t, which is what you would expect.

Secondly, no one bank can unduly influence LIBOR. It is set by a large number of contributing banks (20 or so, depending on which LIBOR is being set), removing the highest and lowest few contributors and then averaging the rest.

Whilst the current set-up is clearly not perfect, it’s not as bad as the current hoo-haa makes out either. You could move to a true market determined fixing method, but that would cause other problems. Only 3m and 6m LIBOR are used in derivatives, so other LIBOR rates would be much easier to move, not least because ‘the bulk of money markets trading is 3m and shorter, so it would be easier for the odd bank who does have money to borrow or lend in longer dated money markets could move those LIBORs much easier to their benefit.

3

Although I understand the wider point being made in the OP, using the term ‘psychopath’ to describe bankers gives the impression that they are different to eg newspaper proprieters and management or any other large corporations, they are not. The only difference is that Barclays and News International have been found out doing dodgy things. No wonder Diamond was reluctant to resign.

There seems to be a manifest view proposed by pro-marketeers that there is a set of Queensbury rules of capitalism which are strictly adhered to by all except the few, and there is a small minority who let the side down, this is not the case, because everyone will act in their own interests. And this is also why libertarianism within capitalism can never work, because individuals acting within markets will end up being forced to respond like with like, to the actions of individuals such as the Murdochs.

How anyone can think that a culture of greed is good for society is lost on me.

7. Shinsei1967

“But before 2008 it was out and out fraud and there should be criminal proceedings.”

As Osborne said in his Commons statement earlier this week the Serious Fraud Office is looking into whether to take forward criminal prosecutions and will report back by the end of the month.

There seems to be a general view that just because bankers haven’t been sent to jail already that criminal prosecutions aren’t being persued. These things just take longer than the public’s (understandable) pitch fork mentality demands.

As an interim measure it might be a good idea to double the SFO’s annual budget so that it can be shown the government is taking this seriously. The SFO runs off £38m pa. That would barely pay the Barclay Board’s annual bonus.

8. Tony Woolf

So lies are all right if politicians think they’re good for us. I can see there are certain situations where this seems to be true: the classic case is an impending devaluation where there are fixed exchange rates (in which case the need for lies also shows that the system is fundamentally wrong).

The only case where I think it is really justified is when talking to the enemy in international diplomacy, while denying that you’re doing it. The justification is saving large numbers of lives and that’s fair enough. But even then it’s very risky, because if found out the lies could well cause worse problems than if they hadn’t been told.

In this case the whole affair with the Bank of England and supposedly senior politicians is still very murky and it is far too early to think we know what really went on. It will be interesting to see if Tucker’s testimony is any more credible than Diamond’s, even though that wouldn’t be saying a lot.

Aside, it’s not exactly true that “we live in a country where you can go to jail for stealing £3.50 worth of water”. In practice this wouldn’t generally happen. However you can go to jail for joining in with a riot which is aimed at the breakdown of civil order.

9. Shinsei1967

@Tony Woolf:

“So lies are all right if politicians think they’re good for us.”

I can’t believe it would have been better if Darling had gone on TV in the midst of the banking crisis and said: “Bloody hell things are bad. I’ve just had Fred Goodwin on the phone and he thinks RBS will be bankrupt by lunchtime.”

An interesting article with some very dodgy syntax.

Absolutely right – the LIBOR scandal is a fraud, which is a crime, and should be properly investigated and punished.
There should also be a full judicial enquiry into the whole of the banking industry so that the whole horrible dishonest carbuncle that is the City can be properly brought to heel.
In the following article i’ve outlined just ten of the questions that I want to see a judicial enquiry look into.
http://www.allthatsleft.co.uk/2012/07/ten-questions-for-the-bankers/

12. Bitter & Twisted

@ steveb 6.

Agreed.

13. Charlieman

There is a very disturbing back story here: that some traders assumed that it was moral to mislead the Libor reporting service. It is a moral case. But I struggle to identify a crime that can be prosecuted, beyond deceiving the Libor service.

This is one for specialised lawyers, but we civilians can make a few guesses about the considerations. For financial fraud to occur, somebody has to have lost money. It is for the lawyers to establish that an individual or organisation relied on Libor at the time when Barclays manipulated loan rates, AND consequently borrowed money at the wrong rate.

The OP suggests that Libor was manipulated in order to boost profits predictions. Deception is clear but how do you establish that anyone traded shares on that mistaken belief?

By my understanding, Libor is a reporting service. Its credibility is based on data being directly provided by banks in good faith, which makes Libor a very upmarket tipster.

The racing page of the Morning Star historically has a very good tipster, but s/he can only perform on the basis of good data; if X tells the Morning Star tipster a pack of lies (leading to a mistaken prediction), there is egg on face and tipster will no longer trust X. Which is where Libor and Barclays reside; did Barclays tell lies that might undermine the reputation of Libor?

14. Charlieman

@7. Shinsei1967: “As an interim measure it might be a good idea to double the SFO’s annual budget so that it can be shown the government is taking this seriously. The SFO runs off £38m pa. That would barely pay the Barclay Board’s annual bonus.”

I like the idea but I am unsure where the SFO finds experts who are not themselves part of the problem to be investigated.

You have no justification for saying the 2005-7 wasn’t just down to bad apples and “they were all doing it”. It did not apply to sterling LIBOR, the core rate, nor did it occur at all in London: a handful of greedy individuals in New York. It was not across the system. Quote “there is no evidence that it affected sterling LIBOR”
@ Charlieman 13
Good post but actually you need to show that the culprit did it in order to gain money – as Barclays was *not* borrowing at LIBOR in 2008, it did not obtain any money by deception so its actions while immoral were not actually fraudulent.

I strongly suspect that nothing will happen to these dodgy Bankers, because, a couple of years ago, Directors of a business that about fifty people worked for (including myself), acted illegally and went on to exploit the workers, by using holes in Employment law to withhold staff wages and ultimately cheat employees out of the money that they had worked hard to earn ( http://bobblackmanmp.info/ ).

Despite Employment Tribunals agreeing that staff were treated badly, the High Court said that they are powerless to help because their is noting stopping this in law.

Now, to rub salt in the wound, Government officials and the local MP simply try to kick the issue into the long grass, by claiming that it’s not in the public interest to do anything about this matter, whilst refusing to have the Directors struck off, failing to introduce new laws to outlaw these kinds of sharp practices, and not even bothering to call for an inquiry into this scandal.

Try this full and illuminating brief on rigging Libor in Saturday’s Economist:

“The rotten heart of finance”: http://www.economist.com/node/21558281

18. Robin Levett

@Charlieman #13 & john77 #15:

#13

This is one for specialised lawyers, but we civilians can make a few guesses about the considerations. For financial fraud to occur, somebody has to have lost money. It is for the lawyers to establish that an individual or organisation relied on Libor at the time when Barclays manipulated loan rates, AND consequently borrowed money at the wrong rate.

#15

Good post but actually you need to show that the culprit did it in order to gain money

Not quite right; fraud requires the acts to be done with the intention:

(i)to make a gain for himself or another, or

(ii)to cause loss to another or to expose another to a risk of loss

So you’re both half-right.

This though is wrong:

…as Barclays was *not* borrowing at LIBOR in 2008, it did not obtain any money by deception so its actions while immoral were not actually fraudulent.

But the gain or loss need not be in LIBOR borrowing; the point is that other derivatives are valued by reference to LIBOR – so manipulating the rate will feed through into difference in values of many other “financial products”. Indeed, that was the express reasoning involved in the emails etc disclosed from Barclays.

@ 18 Robin Levett
You seem to be confused.
I was talking about English Law. The 2005 rate manipulation occurred in New York, so obviously my comments are not relevant thereto (and I hope the US authorities who have a different definition of fraud can and will take action as Bob Diamond implied).
According to the FT, Barclay’s actions in 2008 did not affect LIBOR because their quote was high enough to be excluded as an “outlier” without being high enough to draw unfavourable attention to Barclays (which is what the juniors thought the BoE wanted). Even if it had affected the rate, there is far more, by value, lending linked to LIBOR than bank deposits so reducing LIBOR would lead to lower banking profits (a point Cameron seems to have missed). The reports imply that the action was done with the intent of keeping the BoE happy and avoiding a threat of (quite unnecessary) nationalisation, not to make a profit.
Hence while the misbehaviour in New York ought to be criminal (if only because the traders were obtaining money from their employers that they did not deserve) that by Barclays in London in 2008 does not appear to be criminal insofaras no-one seems to have passed a law forbidding it.

20. Robin Levett

@john77 #19:

You seem to be confused.

I was talking about English Law.

As was I.

The 2005 rate manipulation occurred in New York, so obviously my comments are not relevant thereto (and I hope the US authorities who have a different definition of fraud can and will take action as Bob Diamond implied).

If the manipulation was entirely in New York, and the efefcts were confined to New York, then you might have a point; but nothing I’ve seen suggests it was.

I’m a litttle at a loss as to how this:

…as Barclays was *not* borrowing at LIBOR in 2008

…is not a reference to 2008.

Whether fixing the LIBOR rate low in 2008 lowered or raised your bank’s profits on derivatives trading surely depends on which end of the deal you have? Short selling of a derivative valued by reference to LIBOR, combined with an opportune reduction in Libor, would increase your profit; albeit that that might have been an unintended side-effect in 2008, rather than the whole point of the fraud (as it had been in 2005).

I suspect that staying in business could be seen even by those without an axe to grind as making a gain for yourself or another.

More generally, though, I was responding to your apparent misconception that any gain made as a result of LIBOR-fixing had to be related to borrowing at LIBOR rates.

21. Robin Levett

@john77 #19:

The 2005 rate manipulation occurred in New York, so obviously my comments are not relevant thereto (and I hope the US authorities who have a different definition of fraud can and will take action as Bob Diamond implied).

Actually no, the 2005 rate manipulation didn’t occur (solely) in New York. Barclay’s Submitters (the people who actually fix the rates at which they will submit to BBA for LIBOR setting) are based in London. The Traders who requested bent fixes were located mostly in London and New York. Read the CFTC and FSA Notices; from the CFTC notice

Barclays Bank makes its daily submissions through Barclays’ London Non-Sterling Liquidity Management Desk (the “London Money Market Desk”).

(p5)

and:

Multiple interest rate swaps traders located in Barclays’ New York, London and Tokyo offices asked Barclays’ LIBOR submitters to make certain LIBOR submissions in order to affect the official BBA LIBOR fixings for certain tenors, thereby benefitting their respective derivatives trading positions and either increasing their profits or minimizing their losses. The
vast majority of these requests came from traders on Barclays’ New York Interest Rate Swaps Desk (“NY Swaps Desk”) located in New York and London and involved U.S. Dollar LIBOR.

and:

For a time, a trader sitting in London facilitated many of the requests on behalf of the New York swaps traders by forwarding the requests in person or by email to the submitters.

(both p8)

http://www.cftc.gov/ucm/groups/public/@lrenforcementactions/documents/legalpleading/enfbarclaysorder062712.pdf?bcsi_scan_6ff3f37d49d6906c=6W7p/7vJyri2QcMwRYRpYB9k4th/AAAAzn3iNg==&bcsi_scan_filename=enfbarclaysorder062712.pdf

@ Robin Levett #20
While the tail wags the dog in foreign exchange markets with the volumes traded between banks vastly exceeding (often a large multiple of) the cash value of international trade, there seems no reason to expect any normal bank to have a net position in LIBOR derivatives, which are used to hedge interest rate risk, that comes anywhere near to the size of its floating rate loan book. Banks have risk control officers to limit net positions and gross values of derivatives are a modest percentage of loan books. While Barclays could have made a profit on derivatives by lowering LIBOR in 2008 (except that it didn’t actually affect LIBOR as it’s submission was an outlier), it is simply incredible that this could have exceeded the losses it would have suffered on its loan book, so I didn’t introduce a red herring.

@ Robin Levett #21
Thanks for that – I was mistaken. I had read in the press that it was New York.


Reactions: Twitter, blogs
  1. Liberal Conspiracy

    Why the Barclays Libor scandal was straight-forward fraud http://t.co/oiwxyNeM

  2. Lee Hyde

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  14. Vic Forte

    'Why the Barclays Libor scandal was straight-forward fraud' http://t.co/4U7sIdFj

  15. kevin leonard

    Diamond is not the messiah he's a very naughty boy http://t.co/DWQ0rws9 and needs to be punished

  16. Michael Amherst

    'Why the Barclays Libor scandal was straight-forward fraud' http://t.co/4U7sIdFj

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  18. Jeni Parsons

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  19. Brian Activist

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  20. Ray Sirotkin

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  21. leftlinks

    Liberal Conspiracy – Why the Barclays Libor scandal was straight-forward fraud http://t.co/uEIT0cNb

  22. Chris Horner

    Why the Barclays Libor scandal was straight-forward fraud | Liberal Conspiracy http://t.co/eTDTbhm7 via @libcon

  23. James KM Blake

    Diamond is not the messiah he's a very naughty boy http://t.co/DWQ0rws9 and needs to be punished

  24. Paul Bernal

    Diamond is not the messiah he's a very naughty boy http://t.co/DWQ0rws9 and needs to be punished

  25. Katherine Smith

    Liberal Conspiracy – Why the Barclays Libor scandal was straight-forward fraud http://t.co/uEIT0cNb

  26. BevR

    Why the Barclays Libor scandal was straight-forward fraud | Liberal Conspiracy http://t.co/uswsiVkR via @libcon

  27. goLookGoRead is:

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  28. SheffieldUncut

    'Why the Barclays Libor scandal was straight-forward fraud' http://t.co/4U7sIdFj

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    Why the Barclays Libor scandal was straight-forward fraud | Liberal Conspiracy http://t.co/uswsiVkR via @libcon

  30. Janet Graham

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  31. Charles Smith Brocca

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  34. Alan Hinnrichs

    Why the #Barclays Libor scandal was straight-forward fraud http://t.co/WCfBLhmh

  35. Unitenow

    I wonder if Barclays would consider lowering the interest rate on my mortgage just to help me out #labour http://t.co/skCh5szI

  36. representingthemambo

    Why the Barclays Libor scandal was straight-forward fraud | Liberal Conspiracy http://t.co/WsZAplCq via @libcon

  37. DavidTiley

    I wonder if Barclays would consider lowering the interest rate on my mortgage just to help me out #labour http://t.co/skCh5szI

  38. sunny hundal

    @jonathanhaynes @mjrobbins err no. Libor rate was *raised* prior to crash and lowered after it. Two different cases http://t.co/qA5BEHB6





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