‘Lie-bor’ London: Duuuuude, where’s Barclays’ bonus?

In the middle of the financial crisis, when TV reporters like myself would explain the rise in Libor as a kind of thermometer of financial fear, Mervyn King cracked what now appears to be a rather informed gag. “Libor – the rate of interest at which big banks don’t lend to each other,” said the governor.

What we know now, is that Libor was a bit of an in-joke in the form of ‘Bill and Ted’s interest rate manipulation adventure’. For years the backroom staff submitting the ordinary humdrum figures into the BBA’s Libor spreadsheet were an essential but arcane backwater of Britain’s banks. Then Barclays’ highly paid derivative traders discovered that they could move Libor a fraction and thought they could make or save huge amounts of money. All that was required was gentle email persuasion of the back office Libor submitters.

‘I owe you big time’

So from 2005 Barclays’ derivatives traders asked the bank’s Libor team to change those submissions, with one email suggesting “just tell him … to put it low”. Another trader expresses their concern to the Libor team, telling them: “…dude, you’re killing us”. While another warns the wrong rate could “potentially cost a fortune…would really appreciate any help”. So the Barclays submissions desk changes its rates, responding to one request with: “Done… for you big boy”. Later, traders outside Barclays ask its dealers to lower Libor. After one successful intervention, an external trader says: “Dude. I owe you big time! Come over one day after work and I’m opening a bottle of Bollinger”.

Then as the financial crisis raged, a change: separately senior management at high levels of Barclays HQ got involved. They were concerned that high interbank rates quoted by Barclays made it look like the bank was in trouble. So managers instructed their submissions desk to artificially reduce the Libor rates they were quoting. “Just set it where everyone else sets it, we do not want to be standing out,” said one Barclays Manager. Another said as the world banking crisis raged that we want to “send the message that we are not in the s**t”. The FSA says that in March 2008 Barclays provided the FSA itself with inaccurate information about the rate at which it was funding itself. Misleading the regulator seems incredible at a time when there were widespread worries about banking solvency.

Implications for personal finance

This is an extraordinary turn of events. It has ended with the largest fine ever imposed on the financial regulator. This isn’t just about high finance – it DOES have an affect in the real world. Many interest rates – from mortgages to company loans – are set as a fraction above Libor – say Libor plus three or four per cent. Savers might have effectively got lower interest rates than they should have. Libor should be an objective independent measure calculated as the average of what banks are charged to fund themselves

Instead, traders were conspiring to rig, bend and manipulate this fundamental piece of banking plumbing. As Nicholas Dunbar, author of Devil’s Derivatives told us, “the casino side of the bank contaminated the ordinary day-to-day retail bank”. There is a strong argument for the Treasury to look again at its model form ring-fencing, after the egregious experience of what you might call “Lie-bor”.

Fines – but no criminal charges

Now Barclays face a series of fines – £59m from the FSA. Its the highest ever levied, but actually discounted because Barclays cooperated with the investigation. While in the USA, it has paid a further £230m for similar abuses in America. A staggering embarrassment for Bob Diamond who ran Barclays investment bank at the time. He and top execs will now forgo a bonus for this year, but what of the traders’ historic bonuses? Can there ever have been a stronger case for a forcible repatriation of historic bonuses to named individuals than this?

There can be no criminal charges in derivatives matters, the FSA told us because of the 2001 Financial Services Act brought to us by the last government. They suspect but can’t prove direct pecuniary advantage. The verdict of US regulators seems harsher. Mr Diamond did apologise.

Some politicians argue that Mr Diamond should be fired. He will be called before Andrew Tyrie’s Treasury Select Committee. He should surely answer some valid questions of the media if he wants to ensure the trust of his millions of UK customers. And this only starts at Barclays.

All eyes on London

But there is also a wider issue. In Brussels, Frankfurt, Paris, Washington and New York, politicians and regulators are joining forces to point fingers at the unhappy coincidence in a variety of frauds, misconduct and collapses of London. Carolyn Maloney, New York Democrat congresswoman said at the JP Morgan hearings, before today: “It seems to be that every big trading disaster happens in London”. AIG, the London Whale, Lehman’s, the list goes on. Add Barclays Liebor to that too.