An anonymous insider from one of Britain's biggest lenders – aside from
Barclays – explains how he and his colleagues helped manipulate the UK's
bank borrowing rate. Neither the insider nor the bank can be identified for
legal reasons.
It was during a weekly economic briefing at the bank in early 2008 that I
first heard the phrase. A sterling swaps trader told the assembled
economists and managers that "Libor was dislocated with itself".
It sounded so nonsensical that, at first, it just confused everyone, and
provoked a little laughter.
Before long, though, I was drawing up presentations to explain the "dislocation
of Libor from itself" for corporate relationship managers. I was
deciphering the subject in emails, internally and externally. And I was
using the phrase myself openly with customers of the bank.
What I was explaining was that the bank was manipulating Libor. Only I didn't
see it like that at the time.
What the trader told us was that the bank could not be seen to be borrowing at
high rates, so we were putting in low Libor submissions, the same as
everyone. How could we do that? Easy. The British Bankers' Association,
which compiled Libor, asked for a rate submission but there were no checks.
The trader said there was a general acceptance that you lowered the price a
few basis points each day.
According to the trader, "everyone knew" and "everyone was
doing it".
There was no implication of illegality. After all, there were 20 to 30 people in the room – from management to economists, structuring teams to salespeople – and more on the teleconference dial-in from across the country.
There was no implication of illegality. After all, there were 20 to 30 people in the room – from management to economists, structuring teams to salespeople – and more on the teleconference dial-in from across the country.
The discussion was so open the behaviour seemed above board. In no sense was
this a clandestine gathering.
The main business of the day was to deal with the deepening crisis. And questions were raised about what we, in one of the bank's sales teams, could be doing to earn our wages.
The answer was fire-fighting. Helping the corporate bank with clients – predominantly explaining why the customer's loan was being moved from base rate to Libor and why their interest margin was increasing sharply. It wasn't easy for the corporate bankers. They were under orders from the credit committee, and powers at the top, to change a client's borrowing rate to Libor and increase the margin if any covenant was breached, no matter how small.
We accompanied the relationship managers to meetings to explain what was happening in the economy – why base rate lending could not be sustained, why margins had to increase, and of course to explain the general economic backdrop.
As part of that, we had to explain the "dislocation of Libor from itself". As the trader put it, everyone knew that we couldn't borrow at Libor, you only needed to look at the price of our credit default swaps – effectively survival insurance for the bank – to see that.
What that meant was that even though Libor may have been, for example 2pc, the real Libor rate the bank was paying was more like 5pc or 6pc. So in fact, we needed to be lending money at Libor plus 3pc or 4pc just to break even. That is what we were telling clients.
Looking back, I now feel ashamed by my naivety. Had I realised what was going on, I would have blown the whistle. But the openness alone suggested no collusion or secrecy. Management had been in the meeting, and so many areas of the Treasury division of the bank represented, that this was clearly no surprise or secret.
Libor had dislocated with itself for a very good reason – to hide the true issues within the bank.
Source
Additional:
The main business of the day was to deal with the deepening crisis. And questions were raised about what we, in one of the bank's sales teams, could be doing to earn our wages.
The answer was fire-fighting. Helping the corporate bank with clients – predominantly explaining why the customer's loan was being moved from base rate to Libor and why their interest margin was increasing sharply. It wasn't easy for the corporate bankers. They were under orders from the credit committee, and powers at the top, to change a client's borrowing rate to Libor and increase the margin if any covenant was breached, no matter how small.
We accompanied the relationship managers to meetings to explain what was happening in the economy – why base rate lending could not be sustained, why margins had to increase, and of course to explain the general economic backdrop.
As part of that, we had to explain the "dislocation of Libor from itself". As the trader put it, everyone knew that we couldn't borrow at Libor, you only needed to look at the price of our credit default swaps – effectively survival insurance for the bank – to see that.
What that meant was that even though Libor may have been, for example 2pc, the real Libor rate the bank was paying was more like 5pc or 6pc. So in fact, we needed to be lending money at Libor plus 3pc or 4pc just to break even. That is what we were telling clients.
Looking back, I now feel ashamed by my naivety. Had I realised what was going on, I would have blown the whistle. But the openness alone suggested no collusion or secrecy. Management had been in the meeting, and so many areas of the Treasury division of the bank represented, that this was clearly no surprise or secret.
Libor had dislocated with itself for a very good reason – to hide the true issues within the bank.
Source
Additional:
Libor rigging 'was institutionalised at major UK bank'
Interest rate rigging was institutionalised at one of Britain's biggest banks, an insider has claimed, with market manipulation openly discussed between managers, staff and customers.
By
Philip Aldrick: Barclays was last week fined £290m for trying to fix the inter-bank lending
rate but, in a first person account for The Daily Telegraph, a
salesman at another major UK bank has claimed that "everyone knew"
and "everyone was doing it".
At the insider's bank, around 30 people – including managers and treasurers –
attended an internal meeting in early 2008 where the policy of submitting
artificially low Libor rates was explained in detail and fully justified.
Documents released alongside Barclays' settlement last week also showed that
UK regulators were aware that banks had been understating Libor but did not
act, painting an endemic picture of corruption across the industry.
According to the bank insider, who asked to remain anonymous, manipulating the
inter-bank rate had become so widespread that there was a technical phrase
to describe it – the "dislocation of Libor from itself".
The bank even dispatched sales teams to customers to explain that borrowing
rates were rising because the real rate of Libor was higher than the stated
rate.
According to the Barclays' documents, regulators were informed about systemic
understatement of Libor in late 2007 and early 2008 but turned a blind eye.
The FSA's own documents reveal that on April 17, 2008, a senior Barclays manager told the watchdog "that Barclays had been understating its Libor submissions", admitting that the bank was not "clean clean, but clean in principle".
Barclays explained that it was concerned other banks were fixing the rate and its honesty was making it vulnerable. The FSA, led by chief executive Hector Sants, defended its lack of action by arguing that Barclays had not properly disclosed the degree of its own Libor manipulation at the time.
In a similar conversation with the British Bankers' Association (BBA), whose then chairman was the current trade minister Lord Green, the manager "informed the BBA that [Barclays] had not been reporting accurately, although he noted that Barclays was not the worst offender of the panel bank members".
According to the Commodity Futures Trading Commission, the BBA representative appeared to accept that it was a widespread problem, responding that "no one's clean-clean".
Barclays had first told the BBA in November 2007 that "banks, including Barclays, were submitting rates that were too low", according to the CFTC. The senior manager "encouraged the BBA to react and be heavy handed, suggesting the sanction that banks involved in such conduct be removed from the panel".
However, the BBA, the industry trade body that is responsible for compiling Libor, contacted other banks in a group email but took no further action.
The Bank of England was caught up in the scandal in October 2008, when Paul Tucker, deputy Governor, spoke to Bob Diamond, Barclays chief executive.
Mr Tucker raised the subject of "the external perceptions of Barclays' Libor submissions", which Barclays misunderstood to mean that staff should "under an instruction from the Bank... reduce Barclays' Libor submissions".
A Bank spokesman said: "It is nonsense to suggest that the Bank of England was aware of any impropriety in the setting of Libor. If we had been aware of attempts to manipulate Libor we would have treated them very seriously."
Source
Additional:
A source at the FSA has told the BBC that the figure was simply a "judgement call" by its enforcers.
It said there was no specific formula for deciding how much Barclays should pay.
The FSA also admitted that its approach to coming up with fines is "opaque".
The topic of the FSA's formula for assessing fines is such a sensitive topic, few people want to speak about it - much less be quoted on the record discussing it.
The FSA fined Barclays £59.5m ($93m) for attempting to manipulate the London Interbank Offered Rate (Libor) and the Euro Interbank Offered Rate (Euribor), two interest rates banks use when lending to one another.
On top of that the US regulator, the Commodity Futures Trading Commission (CFTC), levied a fine of $200m (£128.5m) on Barclays, the biggest fine it has ever issued.
The fraud department of the US Justice Department's Criminal Division levied a $160m (£103m) penalty to Barclays "in a related manner".
A director of one prominent shareholder interest group, who declined to be named, said that while the FSA fine was modest in comparison with that of the CFTC, shareholders "would not want it to be any larger as this would impact on future dividends."
The director added that the FSA and CFTC fines combined amounted to almost half of the total dividends paid by Barclays last year.
On the other hand, the FSA fine is equivalent to not more than about ten days' of profit for Barclays.
Critics argue the FSA's £59.5m fine is too small to reflect the seriousness of the misconduct.
Setting the tariff So how did the FSA decide what was an appropriate fine?
The regulator said that Barclays' conduct contravened three of its principles by which all regulated companies must abide.
But it does not prescribe a specific cost to members for contravening them.
It then decides on a percentage of that figure to be the value of the fine.
Where there is not an appropriate figure to hand, or a way to determine the value of any potential damage arising from the violation, it "will use an appropriate alternative".
But the FSA source told the BBC that, in the Barclays case, no alternative figure was generated.
"It is basically a judgement call - no alternative figure was used," the source said.
The regulator's handbook states that the amount of revenue generated by a firm from a particular product or business area "is relevant in terms of the size of the financial penalty necessary to act as a credible deterrent."
But it could not explain how the fine levied relates to either the potential harm caused or the size of the division in question.
The FSA is to be superseded by the Financial Conduct Authority (FCA) at the end of 2012 or the start of 2013.
The BBC's source at the regulator says that it does not anticipate any change to the way it works out the size of fines.
But in a speech to Parliament, chancellor George Osborne hinted at the possibility for criminal proceedings to be brought against individuals involved in the attempted manipulation of interbank rates.
HSBC, RBS, Citigroup and UBS are under investigation for colluding in the attempted manipulation.
If the size of fines reflects the seriousness of the transgression, the incoming FCA may need to examine its US counterparts' harsher response to such astounding governance failures.
It has some time to do so. The BBC has been given to understand that the FSA believes it will take "months" before the next settlement with a bank over Libor manipulation will be announced.
Source
The FSA's own documents reveal that on April 17, 2008, a senior Barclays manager told the watchdog "that Barclays had been understating its Libor submissions", admitting that the bank was not "clean clean, but clean in principle".
Barclays explained that it was concerned other banks were fixing the rate and its honesty was making it vulnerable. The FSA, led by chief executive Hector Sants, defended its lack of action by arguing that Barclays had not properly disclosed the degree of its own Libor manipulation at the time.
In a similar conversation with the British Bankers' Association (BBA), whose then chairman was the current trade minister Lord Green, the manager "informed the BBA that [Barclays] had not been reporting accurately, although he noted that Barclays was not the worst offender of the panel bank members".
According to the Commodity Futures Trading Commission, the BBA representative appeared to accept that it was a widespread problem, responding that "no one's clean-clean".
Barclays had first told the BBA in November 2007 that "banks, including Barclays, were submitting rates that were too low", according to the CFTC. The senior manager "encouraged the BBA to react and be heavy handed, suggesting the sanction that banks involved in such conduct be removed from the panel".
However, the BBA, the industry trade body that is responsible for compiling Libor, contacted other banks in a group email but took no further action.
The Bank of England was caught up in the scandal in October 2008, when Paul Tucker, deputy Governor, spoke to Bob Diamond, Barclays chief executive.
Mr Tucker raised the subject of "the external perceptions of Barclays' Libor submissions", which Barclays misunderstood to mean that staff should "under an instruction from the Bank... reduce Barclays' Libor submissions".
A Bank spokesman said: "It is nonsense to suggest that the Bank of England was aware of any impropriety in the setting of Libor. If we had been aware of attempts to manipulate Libor we would have treated them very seriously."
Source
Additional:
How did the FSA calculate Barclays' fine?
The Financial Services Authority (FSA) admits it cannot explain how it decided what to fine Barclays for attempting to manipulate interbank lending rates.
A source at the FSA has told the BBC that the figure was simply a "judgement call" by its enforcers.It said there was no specific formula for deciding how much Barclays should pay.
The FSA also admitted that its approach to coming up with fines is "opaque".
The topic of the FSA's formula for assessing fines is such a sensitive topic, few people want to speak about it - much less be quoted on the record discussing it.
The FSA fined Barclays £59.5m ($93m) for attempting to manipulate the London Interbank Offered Rate (Libor) and the Euro Interbank Offered Rate (Euribor), two interest rates banks use when lending to one another.
On top of that the US regulator, the Commodity Futures Trading Commission (CFTC), levied a fine of $200m (£128.5m) on Barclays, the biggest fine it has ever issued.
The fraud department of the US Justice Department's Criminal Division levied a $160m (£103m) penalty to Barclays "in a related manner".
A director of one prominent shareholder interest group, who declined to be named, said that while the FSA fine was modest in comparison with that of the CFTC, shareholders "would not want it to be any larger as this would impact on future dividends."
The director added that the FSA and CFTC fines combined amounted to almost half of the total dividends paid by Barclays last year.
On the other hand, the FSA fine is equivalent to not more than about ten days' of profit for Barclays.
Critics argue the FSA's £59.5m fine is too small to reflect the seriousness of the misconduct.
Setting the tariff So how did the FSA decide what was an appropriate fine?
The regulator said that Barclays' conduct contravened three of its principles by which all regulated companies must abide.
But it does not prescribe a specific cost to members for contravening them.
The FSA's handbook sets out its procedure for setting fines, including five steps for penalties imposed on regulated firms.
In setting fines the FSA establishes a figure "that reflects
the seriousness of the breach," commonly the amount of revenue a firm
generates from the part of its business involved in the case. It then decides on a percentage of that figure to be the value of the fine.
Where there is not an appropriate figure to hand, or a way to determine the value of any potential damage arising from the violation, it "will use an appropriate alternative".
But the FSA source told the BBC that, in the Barclays case, no alternative figure was generated.
"It is basically a judgement call - no alternative figure was used," the source said.
The regulator's handbook states that the amount of revenue generated by a firm from a particular product or business area "is relevant in terms of the size of the financial penalty necessary to act as a credible deterrent."
But it could not explain how the fine levied relates to either the potential harm caused or the size of the division in question.
While fines levied by the CFTC are paid in
full to the US Treasury, the FSA keeps the money to reduce the fees
members (except the member who the fine is awarded to) pay it to be
regulated.
The FSA source said that its fine "could not be compared like
for like" with that of the CFTC because they come from different
regulatory regimes.The FSA is to be superseded by the Financial Conduct Authority (FCA) at the end of 2012 or the start of 2013.
The BBC's source at the regulator says that it does not anticipate any change to the way it works out the size of fines.
But in a speech to Parliament, chancellor George Osborne hinted at the possibility for criminal proceedings to be brought against individuals involved in the attempted manipulation of interbank rates.
HSBC, RBS, Citigroup and UBS are under investigation for colluding in the attempted manipulation.
If the size of fines reflects the seriousness of the transgression, the incoming FCA may need to examine its US counterparts' harsher response to such astounding governance failures.
It has some time to do so. The BBC has been given to understand that the FSA believes it will take "months" before the next settlement with a bank over Libor manipulation will be announced.
Source
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