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Global LIBOR Scandal Entails Monumental $350 Trillion in Loans (Die Zeit, Germany)

 

“The allegations at issue relate to financial transactions with a volume of more than $350 trillion: the banks allegedly manipulated the interest rates of interbank loans in order to boost their own profits and conceal the true cost of refinancing those loans. … For years, regulatory authorities in the U.S., Great Britain, Switzerland as well as the E.U., have been investigating more than a dozen major banks around the world on suspicion of manipulating the key interest rate LIBOR.”

 

By Till Schwarze

                              

 

Translated By Stephanie Martin

 

July 6, 2012

 

Germany - Die Zeit – Original Article (German)

First the chairman, then the chief executive, and finally the CEO: over the course of two days, Barclays, Britain's second largest bank, has lost its entire leadership. As a result of attempts by Barclays employees to manipulate one of the most important interest rates in the world, Chairman Marcus Agius was the first to resign. Then, on the following day, Chief Executive Officer Bob Diamond, and finally Chief Operating Officer Jerry del Missier announced their resignations.

 

The ousted tip of the proverbial iceberg, from left to right:

Barclays Bank chairman Marcus Agius, CEO Bob Diamond

and COO Jerry Del Missier.

 

The British financial sector has its next scandal, but it almost certainly will not be confined to the island. For years, regulatory authorities in the U.S., Great Britain, Switzerland as well as the E.U., have been investigating more than a dozen major banks around the world on suspicion of manipulating the key interest rates LIBOR [London Interbank Offered Rate] and EURIBOR. Included are heavyweights like Deutsche Bank, UBS, Citigroup, HSBC and Lloyds.

 

The allegations at issue relate to financial transactions with a volume of more than $350 trillion (€280 trillion): the banks allegedly manipulated the interest rates of interbank loans in order to boost their own profits and conceal the true cost of refinancing those loans.

 

To understand how such a manipulation might work, one must grasp the significance of LIBOR and EURIBOR in the financial industry. The LIBOR determines how much banks have to pay to borrow money from one another. In addition, it is also the benchmark for many other financial transactions. For example, it serves as the basis for corporate loans and for trade in derivatives and other financial products. A number of central banks also use base their monetary policies on LIBOR. And what the LIBOR is for the dollar currency area, the pound or the yen, the EURIBOR is for the euro zone.

 

Banks seemed to have avoided tighter regulation called for just

after the financial crisis. But the LIBOR scandal has prompted renewed

calls to break up the banks. Just how might such a thing occur?

[CLICK HERE OR CLICK PICTURE TO WATCH FINANCIAL TIMES VIDEO]

 

 

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The impact of these key interest rates on the financial industry is therefore considerable and, as the LIBOR and EURIBOR are determined by information provided by the most important banks, the possibilities for manipulation are correspondingly large. Banks report the interest rates other banks are required to pay for loans to the Thomson Reuters agency, which in turn uses those figures to calculate the LIBOR. The reporting of interest rates is highly confidential and based solely on information provided by each bank, and it is very difficult to verify the accuracy of the reported figures.

 

When, after the outbreak of the financial crisis in 2008, the LIBOR did not change as expected, regulatory authorities in Europe and the United States became suspicious and launched investigations. In the case of Barclays, the UK's financial oversight agency, the FSA (Financial Services Authority), concluded that the misconduct was "serious and widespread." Investigations were initiated at the political level, with probes being conducted in the United States as well. In the end, to avoid further damage, Barclays acknowledged attempts at manipulation and agreed to a settlement of almost half a billion dollars.

 

Email shows evidence of manipulation

 

The weight of evidence was overwhelming. Internal e-mails showed the blithe and highhanded attitude of bankers in dealing with interest rates. For instance, one Barclays trader responds to a request by a colleague that he report lower interest rates with "Done ... for you, big guy." This only reinforces the image of reckless gambling on the financial markets - an image which had yet to fade.

 

LIBOR scandal fallout: Amid rising political and public anger over the

Libor scandal. Philip Augar, a former investment banker and author,

and Patrick Jenkiins the FT’s banking editor, discuss the case for

structural and cultural reform in the bank sector, with analysis by

editor Frederick Studemann.

[CLICK HERE OR CLICK PICTURE TO WATCH FINANCIAL TIMES VIDEO]

 

SEE ALSO ON THIS:

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Komsomolskaya Pravda, Russia: Putin is Better than Goldman Sachs
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El Pais, Spain: Playing Chicken is the World's Newest Sport
Mainichi Shimbun, Japan: U.S. Must Prevent Another 'Made in U.S.' Disaster
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Die Zeit, Germany: U.S. Risks 'Plunging World' Into New Financial Crisis
O Globo, Brazil: Global Economy Hangs on 'Mood' of U.S. Voters
The Telegraph, U.K.: Down on the Fourth of July: The United States of Gloom
Financial Times Deutschland, Germany: For Americans, a Dour Independence Day
Financial Times Deutschland, Germany: Who Cares about the U.S. Economy?
Folha, Brazil: U.S. Conservatives Threaten to Plunge U.S. into 'Lost Decade'

 

And this when, in the aftermath of the financial crisis, Barclays actually looked like a winner. The bank was not dependent on state support and was able to buy portions of the failed bank Lehman Brothers. But it is obvious that Barclays concealed its true financial situation by reporting low interest rates, which allowed it to gain access to fresh cash and whitewash its own credit worthiness.

Posted by Worldmeets.US

 

The case in the U.K. is also startling because it involves Bob Diamond, one of the most controversial figures in the City of London. Although he has only been at the bank's helm for about a year, Diamond had been working for Barclays with considerable success as an investment banker since the 1990s. He became a figure of public hatred when he provoked a parliamentary committee in 2011 by calling for an "end to the time of humility" on the part of bankers. In the same year, he pushed to hold on to a total salary of £25 million ($38 million or €31 million).

 

The effect of Diamond's call for an “end to the time of humility” is in effect comparable to Josef Ackermann's victory sign during the Mannesmann trial. The Times called the Barclays boss, "the most hated banker in the city."

 

The public expressions of relief over Diamond's resignation were correspondingly great. "I think it's the right decision for Barclays, I think it's the right decision for the country," said British Finance Minister George Osborne. He said it was a first step toward a new culture of responsibility.

 

The questionable role of the regulatory authorities

 

But seeking to pin blame solely on Barclays and Diamond falls short. An overwhelming amount of data points to mistakes by British regulatory authorities. The Treasury, and in particular, the Bank of England, are being criticized for lax oversight. In the interest of maintaining liquidity in the banking sector, they allegedly neglected their oversight duties or even tacitly considered these transgressions acceptable after the financial crisis.

 

For instance, a phone call from October 2008 was discovered, during which the Vice Governor of the Bank of England demands an explanation from Diamond as to why Barclays is reporting higher interest rates than other banks. The New York Times reported that after this phone call, employees in Diamond's office apparently issued instructions to report lower interest rates in the future. Diamond now calls this a misunderstanding.

 

Which other banks also manipulated interest rates?

 

Governments and market participants are even more concerned about other banks that may have attempted interest rate manipulation. In fact, it would have been impossible for one bank alone to have had an impact on the LIBOR, since extremely high or low values are not included in the calculation of the rate. This raises suspicions of collusion among banks.

 

Mistrust of banking sector is back. The British financial sector is being described as "rotten" at its core. For a number of commentators, the manipulation of the LIBOR has proven that banks cannot be relied on to carry out tasks in a socially-responsible manner. Right now, the anger is great, especially since the British government has supported London banks to the tune of roughly $1.15 trillion (€950 billion). According to The Guardian, that corresponds to each British citizen paying the banks $31,000 (£20,000).

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