How big could the Libor scandal get?
Published: 15th Jul 2012 17:21:08
Does Bob Diamond have reason to feel miffed?
Only enthroned last January as Barclays chief executive, his resignation last week was reportedly forced by the displeasure of the Bank of England governor Sir Mervyn King at his bank's role in rigging Libor.
For those who are still unfamiliar with it, Libor - the "London Interbank Offered Rate" - is an ultra-important benchmark interest rate used in the financial markets.
It is calculated every day by the British Bankers' Association (BBA), and is supposed to reflect the average interest rate at which 16 big international banks based in London can borrow from each other.
So why should Mr Diamond feel miffed?
After all, his bank has agreed to pay a £290m fine after admitting it sought to manipulate Libor for years.
Mr Diamond was in charge of Barclays' investment banking division - the one responsible for the manipulation - at the time.
Well, here are three possible reasons:
Firstly, Barclays has claimed that it was practically forced to under-report its own borrowing cost to the BBA in 2008, because almost ever other bank was also doing so at the time.
Barclays' fear in September 2008 - a time when the global financial markets faced total meltdown - was that its supposedly less dishonest (and therefore higher) reported borrowing cost stuck out like a sore thumb.
To put it another way, if the publicly available Libor data suggested Barclays was having particular trouble borrowing, it could have put the bank (unfairly in Barclays' opinion) on the wrong end of the financial panic, which could even have forced it to be nationalised like RBS.
Secondly, it has emerged that the US and UK financial regulators, including the Bank of England, were well aware since May 2008 that all the banks, not just Barclays, may have been under-reporting their borrowing costs to the BBA's Libor committee.
In other words, the Bank of England had known for years about this problem, but apparently only chose this month to force the removal of Mr Diamond.
Thirdly, the manipulation of Libor by Barclays, and potentially others, since 2007 might even have done us all a favour.
By making it look like they were not in as much financial trouble as they really were, London's banks may have helped to stem the panic in 2008.
Moreover, the lower Libor rate would have resulted in a lower interest rate being charged on the billions of pounds worth of loans to British businesses and homeowners that are linked to Libor.
Yet all these defences miss the real Libor scandal: Barclays did not just admit to having lied about its borrowing cost during the financial crisis.
The bank's traders had apparently been rigging Libor since as early as 2005, long before the crisis began, purely in order to increase their profits (and presumably their bonuses) - although ironically their misbehaviour did not necessarily mean that Barclays as whole earned bigger profits.
Given how arcane the subject matter is, it can be hard for outsiders to appreciate just how shocking this revelation may be for the people, such as Sir Mervyn, whose job it is to regulate the financial markets.
The Libor rate is part of the bread-and-butter of high finance. It is used to calculate the payments on literally hundreds of trillions of pounds worth of financial contracts - several times global GDP, the value of everything produced on the planet in one year.
For regulators to discover that the banks' traders had stooped so low has been a bit like the moment it emerged that News of the World reporters had hacked Milly Dowler's mobile, or that MPs had claimed expenses for the cost of doing up second homes.
In other words, the rigging of Libor may have pushed attitudes at the highest levels to the point of disgust.
What is more, it is hard to see how Barclays could have succeeded in this endeavour without the active collusion of many of the other 15 banks involved in setting Libor.
When the BBA calculates the Libor rate each day, it disregards the four highest and the four lowest submissions it receives from the 16 banks, and then bases the day's Libor on the average of the remaining eight.
It means that if Barclays is acting alone, it has very little ability to influence the Libor rate.
If it submits a rate that is way too high or too low, its submission will simply be disregarded. And even if it does submit a rate within the middle eight, the Libor rate will only rise or fall by one-eighth of the amount by which Barclays misreports its own rate.
All of this raises two big questions:
Firstly, if Barclays is only one of many banks to have misbehaved in this way, is it about to rat on all the other banks involved?
Indeed, could it be that Barclays has actually got off lightly with its fine, because it was the first to come clean? Is the gathering storm about to hit the other banks even harder?
And let's be clear who these "other banks" could be - not just the big UK banks, but also the major US, Canadian, Japanese and continental European lenders. This is a global scandal.
Secondly, if the rigging of Libor has indeed created a sense of disgust among the authorities, have we then reached a tipping point?
Already, the Serious Fraud Office has seemingly reversed course and opened a criminal investigation into Libor.
Could this be the beginning of a much more aggressive exposure of the misbehaviour of bankers during the last decade, going well beyond Libor?
At 12:56:39 in SportDidcot shooter Dan Rivers says he is "excited" to have been named in England's Commonwealth games squad for this summer's event in Glasgow.
At 12:56:00 in SportDavid Moyes has thanked Sir Alex Ferguson for giving him the chance to manage Manchester United.
At 12:55:30 in EnglandThe brother of a man killed in a helicopter crash spoke of his family's "five years of heartache" as he called for the operator to be prosecuted.
At 12:52:13 in Northern IrelandAn independent elections watchdog has warned there is only two weeks left for voters to register to be eligible to vote in the local government and European elections on 22 May.
At 12:51:49 in SportLaunceston assistant coach and former captain Tom Rawlings is leaving the club after criticising the process for appointing a new coaching team.
At 12:50:55 in SportJason Quigley has announced he is turning professional - six months after becoming the first Irishman to reach a final at the World Championships.
At 12:49:39 in HeadlinesEx-News of the World chief Andy Coulson has said he did not "cover anything up" following the arrest of the paper's royal editor Clive Goodman in 2006.
At 12:45:42 in ScotlandParents of babies whose ashes were disposed of without their knowledge have said they were "stunned" to learn a report into the scandal was handed over last week.
At 12:44:32 in WalesSupporters of gay marriage should be patient if they want the blessing of the Church in Wales, its archbishop has said.
At 12:43:19 in BusinessNearly two-thirds of people have never switched energy supplier, according to a survey for the energy regulator, Ofgem.
Harvard CitationBBC News, 2012. How big could the Libor scandal get? [Online] (Updated 15th Jul 2012)
Available at: http://www.ukwirednews.com/news/1440644/How-big-could-the-Libor-scandal-get [Accessed 23rd Apr 2014]
News In Other Categories
An independent elections watchdog has warned there is only two weeks left for voters to register to be eligible to vote in the local government and European elections on 22 May.
Parents of babies whose ashes were disposed of without their knowledge have said they were "stunned" to learn a report into the scandal was handed over last week.
Supporters of gay marriage should be patient if they want the blessing of the Church in Wales, its archbishop has said.
With the doors to its brand new £1million training centre officially open, one of the UK's leading apprentice training providers, Bristol based S&B Automotive Academy, is showcasing its world-class facilities by launching a series of foreign student exchanges for the first time in its 41-year history. To get a flavour of what life is like as an apprentice in the UK, the Academy hosted 16 apprentice engineers and bus drivers from the G9 Automotive College in Hamburg, Germany, as part of a Europe-wide vocational training initiative called the ‘Leonardo Programme’ with support from the European Social Fund. In a reciprocal arrangement, S&B will be sending nine apprentices to Germany during February 2012 so that they can get an appreciation of life in the automotive industry on the Continent. A further three German exchange groups are being planned for next year. Designed to assist the development of vocational skills and training across Europe, including work placements for trainees, the Leonardo Programme has a budget of €1.75bn, which is helping to encourage UK organisations to work with their counterparts abroad. In what is expected to be another challenging year for employers in the UK automotive sector, S&B’s Chief Executive, Jon Winter, claims that the exchange initiative will bring many benefits to the Academy and its apprentices: “In a world of global automotive brands, it’s important for our learners to understand the international context of the industry they have chosen to make their career. This new exchange programme will enable apprentices and Academy staff alike to achieve a better understanding of the challenges and opportunities within the automotive arena in Europe. With the Academy’s influence also extending to the USA and Asia, there’s every possibility that this initiative could move further afield in the future.” Continued Winter: “The need for skilled technicians across the world is on the increase and we actively encourage our apprentices to look at broader horizons during their training. Many of them have already learned the phrase ‘Vorsprung durch Gelehrtheit’, quite simply, ‘Advancement through learning.” In the 2010/11 academic year, S&B doubled the number of successful Apprenticeships over the previous year with some 350 apprentices graduating from the Academy. At the same time, achievement levels reached an all-time high with an overall success rate of 85%. For those learners on the Advanced Apprenticeship three-year programme, success rates were even higher, at over 98%. PHOTO CAPTION: As part of their exchange visit, S&B Automotive Academy arranged for the German apprentices to visit Hampshire bus operator, Bluestar, at its Barton Park depot. The students are pictured with S&B’s Andy West (3rd right) and Steve Prewett, Bluestar’s Area Engineering Manager (2nd right). Ends http://www.sandbaa.com
Didcot shooter Dan Rivers says he is "excited" to have been named in England's Commonwealth games squad for this summer's event in Glasgow.
The brother of a man killed in a helicopter crash spoke of his family's "five years of heartache" as he called for the operator to be prosecuted.