Barclays and the LIBOR scandal
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1) There were many individuals that benefitted from the manipulation of LIBOR. The Barclays derivatives traders, Money Market Desk, Bob Diamond and senior management and other banks all had some sort of gain from the LIBOR scandal.Let’s start with the people that had the most monetary gain – the Barclays derivative traders. It is said that LIBOR has been manipulated since the early 90s. Since then, there has been trillions of money made by derivate traders as they influence LIBOR. The traders communicated with the Money Market Desk, the individuals who submitted LIBOR rates, in order to manipulate the rate to their favour. In fact, the investigation found the derivate traders were not at all quiet about their discussions to the Desk regarding the manipulation of LIBOR. One conversation between a trader and a submitter went public and the submitter basically ensured the trader he would submit one less basis point from what he should actually submit.
A calculation derived from Galen Burghardt’s The Eurodollar Futures and Options Handbook shows that a manipulation of one basis point for a low 3-month fix can earn the trader over $2million dollars from an $80 billion deal. For a deal that is often settled, the derivative traders made their fair share of money by manipulating LIBOR. According to the Barclays and the LIBOR Scandal article, the derivative traders and the Desk was located on the same trading floor, which if you asked me, says a lot about Barclays internal control regarding LIBOR rate submissions in itself. The Desk benefitted from manipulating LIBOR in my opinion although nothing has been published. This is because nobody will do anything for someone unless they receive something in return. And the fact that submitting altered rates can earn a trader millions of dollars. In my opinion, the submitters received sums of money from the traders they ‘helped’. Bob Diamond and Barclays senior management gained from the LIBOR scandal. Management needs to keep their investors happy in order to keep their salaries and bonuses high and they do so by keeping stock prices up.
Stock prices fluctuate due to many factors and revenue is a key factor. 35% of Barclay’s total income came from BarCap, Barclay’s investment bank. According to the article, Diamond’s compensation was so high individuals were branding him the “unacceptable face” of banking. British lawmakers were also unfavourable with Diamond being extremely high paid. The LIBOR manipulation produced high revenues for Barclays, which paid Diamond and senior management high salaries. Lastly, all the banks who submitted lower rates in order to make their institutions looks better benefitted from the scandal. Low interest rates mean the bank is in good financial condition. The world works in equilibrium or as the article calls it a zero sum game. In other words, as the above mentioned were benefitting from the LIBOR manipulation, others were getting hurt by it.
Since trillion dollar contracts depended on LIBOR, the victims of the manipulation were anyone tied to those contracts and trades. For example, student loans that were borrowed from a lower LIBOR benefitted while investments backed by the interest in said loans. Darrell Preston for Bloomberg explained how municipal governments were hurt when the rates were manipulated.ii In The US, municipal governments used derivatives in order to offset the risk of higher interest costs, however, the agreements failed because the rates went down unexpectedly. The government was making larger payments into trades that were not worth as much. So if I lived, in one of the municipal governments who fell for the trap, I would also be a victim as a tax payer.
2) It is easy to point fingers in such a big scandal that has affected millions of people. There were a lot of individuals responsible for the manipulation of LIBOR. Some might say the traders were responsible for putting pressure on the submitters while the submitters and Jerry de Messier may be held responsible as they were the ones actually doing the deed, however, the most responsible are the regulators. The UK Financial Services Authority (FSA), Bank of England (BoE) and the Commodity Futures Trading Commission (CFTC) are bodies that were supposedly regulating LIBOR. As part of the Financial Services and Markets Act 2000, the FSAs sole purpose are to meet their four objectives: maintain market confidence, enhance financial stability, protect the consumer and reduce financial crime. By not implementing rules, doing enough investigations and enforcing power, the FSA has failed to meet all these objectives.
Trust was lost in the UK Financial system when the LIBOR scandal went public, banks revealed themselves to not be as financially stable as what they portrayed to be, a number of consumers got scalped by the manipulation and the LIBOR scandal occurred as one of the biggest financial crime that has yet to send individuals to jail. As a regulator that failed to meet all of its objectives, the FSA had a responsibility in the LIBOR scandal. Being the UK’s central bank, the BoE’s mandates were to provide monetary stability and financial stability. Even if this body does not oversee banks’ compliance with regulations, the scandal led to monetary and financial instability, which should concern the BoE. In fact, Diamond testifies against Paul Tucker, the deputy governor in charge of financial stability for the BoE. Diamond claims Tucker implied the LIBOR rate is high and should be lowered. Moreover, Tucker was told by the British Bankers Association (BBA) and US regulators about the manipulation and submissions of low LIBOR another email was sent to Tucker warning him of banks submitting false rates for incentives.
Although BoE was no a regulatory body per se, the central bank has a responsibility to the people of UK and the people affected by LIBOR because the BoE has the power to correct the wrong doings of other banks. Lastly, the CFTC is a governing body that is supposed to protect users from manipulation to instruments subject to the Commodity Exchange Act. Well, section 6(c) of the act authorizes the CFTC to act on manipulation or attempts to manipulate the market price of any commodityiv The act states an attempt to manipulate instruments such as LIBOR is a violation, the commission did not even need any actual proof that manipulation was being done, they only need proof for the attempts of manipulation. But like the other regulators, the CFTC failed to meet its duties and the LIBOR scandal grew to its extent. The FSA, BoE and CFTC all failed to perform their duties as institutions that protect the public from something like the manipulation of LIBOR.
3) If leaders did not have to make ethical decisions, the easiest way to deal with cheating competitors is to do exactly what they are doing. It is easy to tell ourselves, “They are doing it and getting away with it, why can’t I do the same thing?” But that it was separates the leaders we should stay away from and leaders we all aim to work for. As a leader, if I have knowledge of my competitors cheating, I would approach the regulators. In this particular case, since the regulators are part of the manipulation, which will be addressed later, I would go public with this issue. If I were Bob Diamond and I took over Barclays in the condition it was in, I would basically turn the company in, pay the fines and fees as consequences of the company’s prior actions, turn the company around and start new.
This way, there would not be any new victims of the crime. Now I know that 31% of Barclays revenues come from its investment sub BarCap, and doing the right thing would make revenues plummet, which in turn, would take a hit on my salary; however, I am the type of person who would rather put in an honest day’s work and get paid less than lie and cheat my way to a higher salary. Moreover, students are constantly asked in class if we were willing to pay a little bit more money on a product that we know was ethically developed than paying less for something that came from an extorted third world country; and most of us would be willing to. Another article from Harvard Business School concludes when unethical behaviour is made salient, people pay more attention to their own morals and start thinking more ethically.
I believe it would be the same in the scandal if it were made public; people’s tendency to do unethical things like lie, cheat or manipulate LIBOR would decrease. It is tougher to ignore regulators than competitors because I see regulators as bodies who guide us to doing the right things. I mean, that is their job – to regulate and make sure everyone is doing what they are supposed to do. If I was on Barclays place and the governor of BoE tells me that my rates should really be lower than what they are, I would kindly refuse the suggestion and provide back up as to why my rates are as high as they are. It is one thing to turn them down, and another to report them so the unethical act will not happen again. I would get a lawyer first to protect myself and get as much governing bodies on my side. For example, I would include the UK Treasury and Parliament as they do govern the FSA. The Treasury, in fact, announced Fair and Effective Markets Revenue in order to extend legislation to regulate LIBOR.vi This started in June 2014 and I think it could have started earlier had the Treasury been informed causing less people to be victims of the LIBOR scandal.
4) My assessment to fix LIBOR as it is listed on the article is as follows:
1. LIBOR administration subject to statutory authority creating new law. There are some flaws to this. There are already current regulators that are supposed to oversee the process and unless the new laws state unlimited liability to individuals that manipulate or attempt to manipulate LIBOR. They will be responsible for any fines and monetary losses by future victims.
2. The oversight of the process of rate setting being moved from the BBA to a new administrator is somewhat the same as the previous one in terms of bringing in a new body instead of working with what we currently have. I see appointing new administrators for this job as wasteful of resources, time and money. I think the government should keep BBA in overseeing the rate-setting process, however, introduce new policies for manipulation to be nearly impossible. For example, daily supervision of emails and phone calls is key as the traders and submitters were not very quiet about their attempts to lower their rates because they found nothing wrong in what they were doing.
3. This fix would make the most impact in setting LIBOR honestly. If banks were required to back their numbers up, they would not find it as easy to set rates.
4. Developing a code of conduct is also a good idea as it transfers the liability from nobody to the administrators. I see a code of conduct like a contract of how people should act and do their jobs. Any individuals who stray from the code of conduct can be seen as a violation of contract.
5. Since LIBOR is vastly used in other markets outside of the UK, I think it is key for LIBOR to be set in other currencies and maturities if and only if there is hard market date (just like #3) to back the numbers up. This way, it would not be as easy tweaking the rates.
6. The rates being kept private and embargoed for 3 month further reassures me that it would be tougher for LIBOR to be manipulated. The less banks know of other banks’ rates, the tougher it would be to change rates in concert with each other. The process of setting LIBOR is so flawed I think the “easiest” way is to end it. However, this is not most ideal as trillion dollar worth of contracts would need to be renegotiated. But by simply following the steps to slowly feel the process of setting LIBOR, I think the public can grow its trust back into it again.