On Wednesday June 27th global news reports simultaneously reported that Barclays PLC, the multinational banking and financial services company, had agreed to pay a total of $450 million or Ksh 37.8 billion to British and American regulators, to settle charges that the bank manipulated international loan interest rates.
A Reuters report wrote, ‘Barclays said it had reached settlements with Britain’s Financial Services Authority, the U.S. Commodity Futures Trading Commission and the Department of Justice over a long running probe into the setting of the so-called LIBOR rates.’
Barclays PLC, which has its headquarters in London, and operates in more than 50 countries across Europe, Asia, Africa and the Americas, agreed to pay $160 million of the total $450 million to the US Department of Justice for violations relating to the bank’s submission of the London Offered InterBank Rate (LIBOR) and the Euro InterBank Offered Rate (EURIBOR) according to a statement by the United States Department of Justice.
LIBOR & EURIBOR Fixing
The same statement by the US Department of Justice says that Barclays’ LIBOR and EURIBOR rate submissions were sometimes false, adding that ‘For years, traders at Barclays encouraged the manipulation of LIBOR and EURIBOR submissions in order to benefit their financial positions; and in the midst of the financial crisis, Barclays’ management directed that U.S. Dollar submissions be artificially lowered.’
LIBOR is the principal interest rate at which banks in more than 60 countries lend short-term money to each other to meet their needs according to a report in the Pittsburgh Post-Gazette. It is the equivalent of Kenya’s Inter-Bank Rate which serves the same purpose. The EURIBOR is the same rate for banks that mainly use the Euro currency (Euribor-rates.eu).
Accusations of rate fixing stem from the fact that Barclays Bank was one of the financial institutions that contributed rates used in the calculation of the final LIBOR and EURIBOR rates that eventually got implemented. An official information release on the Barclays website gives a chronology of key events in the scandal, saying that between 2005 and 2009, ‘Certain traders sought to manipulate Barclays LIBOR submissions by sending requests to submitters. The majority of these were sent during 2005 to Sept 2007 and sporadically in 2008/2009.’
“LIBOR and EURIBOR are critically important benchmark interest rates,” said Assistant US Attorney General Breuer in the statement by the US Justice Department. “Because mortgages, student loans, financial derivatives, and other financial products rely on LIBOR and EURIBOR as reference rates, the manipulation of submissions used to calculate those rates can have significant negative effects on consumers and financial markets worldwide.
Barclays and other undetermined banks purportedly tried to manipulate the LIBOR for increased profits in trading financial derivatives of which the Bank is a major trader. ‘Barclays was a leading trader of these sorts of derivatives, and even relatively small moves in the final value of LIBOR could have resulted in daily profits or losses worth millions of dollars.’ The Economist wrote in an article on July 7th.
The article went on to give an example writing ‘In 2007, for instance, the loss (or gain) that Barclays stood to make from normal moves in interest rates over any given day was £20m, the equivalent of Ksh 3.36 billion.
Pressure mounted
After the story broke on Wednesday last week, the noose tightened on Barclays PLC with focus on Bob Diamond, the bank’s then CEO. “People have to take responsibility for the actions and show how they’re going to be accountable for these actions.” said British Prime Minister David Cameron on Thursday, as reported in the Guardian.
“As far as the chief executive of Barclays is concerned, he has some very serious questions to answer today. What did he know and when did he know it? Who in the Barclays management was involved and who therefore should pay the price?” asked British Chancellor George Osborne in the same report. Bob Diamond had earlier written a letter to the Chairman of the treasury where he acknowledged the guilt of the Barclays traders involved in the fixing scandal for their “wholly inappropriate behavior” and that the bank would fire those responsible.
The scandal rippled to affect the bank’s share, which on Thursday, one day after the interest rate fixing allegations broke, fell with the biggest one-day margin in three years on speculation that lawsuits would follow, Bloomberg reported.
Resignations
By Sunday July 1st, international newspapers had shareholders calling for the resignation of the Barclays Chairman. A day later, on Monday July 7th, Barclays Chairman Marcus Agius officially resigned saying “the buck stops with me”, the Daily Herald reported. A day before, on Sunday June 1st, Sir Michael Rake was appointed the vice Chairman of the bank to carry on the duties of the former chairman according to a report in The Telegraph.
Monday also saw authorities in Britain launch an inquiry on the interest-rigging scandal adding pressure on then Barclays CEO Bob Diamond to resign. Meanwhile, Barclays committed to conduct their own 9-month internal inquiry on how some staff members purposely manipulated the LIBOR.
On Tuesday July 2nd, Barclays CEO Bob Diamond officially announced his resignation saying “The external pressure placed on Barclays has reached a level that risks damaging the franchise – I cannot let that happen,” (Bloomberg). Sky News reported on the same day that the bank would ask Diamond to forfeit almost 20 million pounds or Ksh 2.52 billion.
Questioning
On Wednesday July 4th Bob Diamond appeared before a Select Committee of British MPs where he was cross-examined for nearly three hours. In the questioning, it emerged that Britain’s financial regulators had always been worried about Bob Diamond’s position at the helm of Barclays Bank. It also emerged that Bob Diamond was out of touch with the goings on at his bank, the Guardian reported.
Other Banks
With the scandal purported to have involved other banks, new developments could emerge as investigations continue. As always, we will keep you in the loop.