LIBOR Manipulation Was No Secret

Article excerpt

Regulators knew about it, finally acted after publicity

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. …