LIBOR manipulation was no secret

In June, British and American authorities fined the United Kingdom's Barclays Banks 290 million pounds (US$450 million) for manipulating key moneymarket benchmark rates, such as the London Interbank Offered Rate (LIBOR) and Euro Interbank Offered rates (EuroIBOR).

Pre-2007, Barclays manipulated rates to obtain financial benefits. Subsequently, during the global financial crisis, Barclays manipulated rates due to reputational concerns.

Lord Turner, head of the U.K.'s Financial Services Authority, told a parliamentary committee it hadn't occurred to him before 2009 that the rate was something that could be manipulated. However, anecdotal evidence suggests LIBOR submissions may have been manipulated over a long period. Banks and regulators may have been aware of these practices for some time, but did not take corrective action.

Barclays' senior management and board of directors have indicated they became aware of the problem recently. Banks offer the same excuse J.P. Morgan Jr. did in 1933: "Since we have not more power of knowing the future than any other men, we have made many mistakes (who has not during the past five years?), but our mistakes have been errors of judgment and not of principle."

The practice appears blatant and warnings were ignored. Canadian court documents indicate a UBS employee contacted employees at other banks with a view to achieving a "certain movement" in yen LIBOR. The correspondence does not attempt to hide the actions from superiors or express concern about any breach of internal or regulatory rules.

In a Singapore lawsuit against the Royal Bank of Scotland for wrongful dismissal, trader Tan Chi Min alleged he and colleagues were regularly consulted by senior managers and personnel responsible for setting the bank's yen LIBOR. The filing alleges there was no regulation, policy or guidelines for submissions. RBS's position is Tan was dismissed for trying to manipulate the bank's rate-setting to benefit his trading positions between 2007 and 2011.

Between 2007 and 2008, it appears Barclays' compliance department did not act on three separate internal warnings about conflicts of interest and "patently false" rate submissions. In an opinion piece published in the Independent on July 7, a former Barclays employee alleged problems with LIBOR fixings were escalated by several people up to their directors and further within the organization.

Recent disclosures indicate U.K. and U.S. regulators knew banks were posting artificial rates that did not correspond to the actual rates the banks would pay to borrow. In April 2008, a Barclays employee notified the Federal Reserve Bank of New York that the bank was underestimating its borrowing costs. A transcript of the phone call is revealing: "... We know that we're not posting, um, an honest LIBOR... We are doing it because, um, if we didn't do it... it draws, um, unwanted attention on ourselves."

On June 1, 2008, Timothy Geithner, then head of the New York Fed, emailed Mervyn King, governor of the Bank of England, urging changes in the way the LIBOR is calculated. Internal New York Fed reports reveal concern about possible misreporting of LIBOR. None of these concerns was made public or steps taken to address the problem. Regulators, it seems, feared the truth would destabilize already panicked markets.

Large banks are too big too fail, a concept now codified in bank regulations. It remains to be seen whether large banks and their employees are too big to jail.

Authorities have settled cases of LIBOR manipulation, perhaps driven by a desire to avoid creating a banking panic in an environment where financial institutions are vulnerable.

Barclays received immunity from prosecution in return for co-operating and settling the matter. UBS, too, has received limited immunity from Canadian and Swiss regulators in return for co-operation.

The U.K. FSA case was based on breaches of various parts of its Principles for Businesses code, specifically Principle 5, which requires a firm to observe proper standards of market conduct. The report concluded: "The definitions of LIBOR and EURIBOR require submissions from contributing banks based on their subjective judgment of borrowing or lending in the interbank market. The definitions do not allow for consideration of derivatives traders' positions or of concerns over the negative media perception of high LIBOR submissions." The U.S. Department of Justice cited violations and misconduct, without specifying offences.

The actions, on their face, constitute manipulation and fraud, violating applicable securities laws. They may also breach antitrust and criminal law. Evidence released shows possible criminal intent. Emails indicate awareness of the illegality: "Don't talk about it too much;" "Don't make any noise about it please;" "This can backfire against us." Individual traders and the bank that is responsible for its employees' actions would be liable.

Facing media attention and public fury, U.S. and U.K. authorities are belatedly exploring possible criminal charges.

Satyajit Das is author of Extreme Money and Traders, Guns & Money and a consultant to Jory Capital.

The LIBOR Fix

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Republished from the Winnipeg Free Press print edition August 4, 2012 B7