Sheila Melvin and Professor Ken Shotts prepared this case as the basis for class discussion rather than to illustrate either effective or ineffective handling of an adminis

CASE: ETH-03

DATE: 11/07/13

Sheila Melvin and Professor Ken Shotts prepared this case as the basis for class discussion rather than to illustrate

either effective or ineffective handling of an administrative situation.

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BARCLAYS AND THE LIBOR:

ANATOMY OF A SCANDAL

Culture is difficult to define, I think it's even more difficult to mandate—but for me the evidence of

culture is how people behave when no one is watching. 1

-Bob Diamond, (former) Barclays CEO

INTRODUCTION

On June 27, 2012, the storied British bank Barclays admitted that it repeatedly attempted to rig

the London Interbank Offered Rate (LIBOR) over a four-year period from 2005-2009. The

LIBOR was calculated daily, based on the rates at which 16 banks estimated they could borrow

money. 2 Barclays, as one of these banks, regularly submitted rates that were either falsely

inflated or deflated, first with the aim of benefitting its trading positions and later, during the

financial crisis, with the intention of projecting an image of strength and solvency. Tracy

McDermott, acting director of enforcement and financial crime at the United Kingdom (U.K.)

Financial Services Authority (FSA), stated: “Barclays’ misconduct was serious, widespread and

extended over a number of years…Barclays’ behavior threatened the integrity of the rates with

the risk of serious harm to other market participants.” 3 In its settlement, Barclays agreed to pay

$453 million in fines and penalties to bank regulators in the U.K. and U.S. 4

1 “Today Business Lecture” delivered in 2011, quoted in Fixing LIBOR: some preliminary findings, Paragraph 111,

http://www.publications.parliament.uk/pa/cm201213/cmselect/cmtreasy/481/48103.htm (September 19, 2013) 2 In 2012, the number of banks on the Libor Panel was increased to 18.

3 House of Commons Treasury Committee, Fixing LIBOR: some preliminary findings, Paragraph 7

http://www.publications.parliament.uk/pa/cm201213/cmselect/cmtreasy/481/48103.htm (September 19, 2013). 4 This included a $200 million civil penalty levied by the U.S. Commodity Futures Trading Commission; a $160

million penalty from the U.S. Department of Justice; and a £59.5 million fine by the U.K. Financial Services

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Barclays and the LIBOR: Anatomy of a Scandal ETH-03

p. 2

Barclays CEO Bob Diamond—who was in charge of Barclays Capital from 2005-2009, the

period during which the breaches occurred—announced that he and three other executives would

waive their annual bonuses, an act of contrition that was quickly deemed inadequate, and even

dubbed “utterly pathetic” by one commentator. 5 On July 1, 2012, Prime Minister David Cameron

announced a full parliamentary inquiry into LIBOR rate rigging, and raised the possibility of

criminal sanctions. During the next few days there was turmoil in Barclays’ leadership,

culminating in Diamond’s resignation.

Newspapers decried Barclays’ rate-rigging efforts as “the scandal of all scandals” 6 and

bemoaned the spread of “Wall Street sleaze.” 7 Numerous hearings, audits, and other post-

mortems were conducted in an attempt to understand how the rigging had been carried out and

why it had gone undetected for so long. Barclays was credited for cooperating with investigators

and agreeing to settle at an early stage; the fine levied by the FSA was therefore reduced by 30

percent. 8 Throughout the process, Barclays insisted that it was not alone in its manipulation of

the LIBOR. In a July 15, 2012 memo entitled “Restoring our reputation, building our business,”

Barclays’ executive committee stated, “As other banks settle with authorities, and their details

become public, and various governments’ inquiries shed more light, our situation will eventually

be put into perspective.” 9 By late 2012, dozens of other banks did indeed face LIBOR-rigging

inquiries by regulators in various countries.

BACKGROUND

The LIBOR

The LIBOR was a cornerstone of global financial markets. Roughly speaking, it was the interest

rate that banks charged each other for short-term loans. The LIBOR was calculated for 10

different currencies and 15 borrowing periods. The person submitting the daily LIBOR data for

a bank was supposed to submit the interest rate the bank would have to pay on a loan for a

particular term in a particular currency. Often, a bank was not in the market for a particular type

of loan, and in such situations the submitter was supposed to give a good-faith estimate of the

interest rate his or her bank would pay were it seeking a loan just prior to 11:00 a.m. GMT. The

estimated rates were sent to the British Bankers Association (BBA), a trade group, and the

Authority. See George Gilligan, “The Libor Scandal: Another Example of Neutralized and Routinized Deviance in

the Financial Services Sector?,” The University of New South Wales, Centre for Law, Markets & Regulation,

http://www.clmr.unsw.edu.au/article/ethics/libor-manipulation/libor-scandal-another-example-neutralised-and-

routinised-deviance-financial-services-sector (September 19, 2013). 5 “Agius takes the bullet,” The Economist, July 1, 2012

http://www.economist.com/blogs/schumpeter/2012/07/barclays-and-libor (September 5, 2013). 6 Robert Reich, “The Wall Street Scandal of All Scandals,” July 7, 2012, http://www.huffingtonpost.com/robert-

reich/libor-wall-street_b_1656665.html (September 19, 2013). 7 Robert Reich, “Wall Street Sleaze Keeps Growing,” July 14, 2012, http://www.sfgate.com/opinion/article/Wall-

Street-sleaze-keeps-growing-3705814.php (September 19, 2013). 8 Financial Services Authority, “Final Notice, To Barclays Bank, PLC,” Section 2, June 27, 2012,

http://www.fsa.gov.uk/static/pubs/final/barclays-jun12.pdf (September 19, 2013). 9 “Rivals LIBOR woes to put Barclays’ in perspective: memo,” Business Standard, July 15, 2012,

http://www.business-standard.com/article/international/rivals-libor-woes-to-put-barclays-in-perspective-memo-

112071500061_1.html, (September 19, 2013).

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This document is authorized for use only by Rashik Ahmed in FIN 9858 Summer 2022 taught by RHONDA HALPERN, CUNY – Baruch College from Jun 2022 to Jul 2022.

Barclays and the LIBOR: Anatomy of a Scandal ETH-03

p. 3

LIBOR was calculated as the average of these submitted rates, after the removal of high and low

outliers. In the case of the U.S. dollar LIBOR, the top four and bottom four submissions were

eliminated and the middle eight were averaged to determine the rate.

The LIBOR’s origins stem from the informal practices of a clubby group of British gentlemen

bankers in the 1960s. Beginning in the 1980s, the process became more formalized and was

taken over by the BBA. BBA regulations stated clearly that the only factors to be considered in

submitting a rate were those related to the cost of borrowing unsecured funds.

The LIBOR was used for hundreds of trillions of dollars of financial transactions, including

consumer loans, mortgages, and much of the global trade in financial derivatives. In 2012, The

New York Times reported that about 45 percent of prime and 80 percent of subprime mortgages

had interest rates based on the LIBOR; and about half of variable rate student loans were set

according to the LIBOR. 10

The BBA estimated that $350 trillion of notional swaps and $10

trillion of loans were indexed to the LIBOR. 11

Trying to determine who may have been

harmed—or helped—by the rate-rigging was described as a “gargantuan task.” 12

Two Forms of Rate-Rigging

Two main forms of rate-rigging took place at Barclays. The first occurred primarily between

2005 and 2007 and involved individual traders requesting the submission of rates that would

benefit their transactions, rather than rates at which Barclays actually believed it could borrow

money. The person who submitted a bank’s data for LIBOR calculations could overstate or

understate the true rate that the bank would pay on short-term loans. By doing so, he could help

traders who had taken positions that depended on the LIBOR rate. For example, a Barclays’

trader in New York might take a position that would be highly profitable if the LIBOR rate were

low, and then send an e-mail to the Barclays trader in London who was in charge of submitting

rates, asking him to submit a low value. Exhibit 1 gives an example of how a trader could

benefit from LIBOR rate-rigging.

The second form of rate-rigging occurred during the 2007-2008 credit crisis, when banks were

concerned about appearing strong. One indicator of a bank’s strength was whether other banks

were willing to lend it money on favorable terms. Each bank thus had an incentive to

underreport the rates it would have to pay if it sought loans. According to British regulators,

high-level Barclays’ officials ordered subordinates to submit lower LIBOR estimates to avoid

seeming weak. However, in testimony, a senior Barclays’ executive involved in the rate-rigging

said he was just trying to keep Barclays in good favor with government officials, who were

unhappy when Barclays submitted high rates for LIBOR calculations.

10

“Behind the LIBOR Scandal,” Business Day Deal Book, The New York Times, July 10, 2012,

http://www.nytimes.com/interactive/2012/07/10/business/dealbook/behind-the-libor-scandal.html (September 19,

2013). 11

Commodity Futures Trading Commission, “In the Matter of Barclays PLC, Barclays Bank PLC, and Barclays

Capital Inc,”

http://www.cftc.gov/ucm/groups/public/@lrenforcementactions/documents/legalpleading/enfbarclaysorder062712.p

df, p. 5 (September 19, 2013). 12

Kirsten Grind, “What Libor Means for You,” The Wall Street Journal, August 3, 2012,

http://online.wsj.com/article/SB10000872396390443545504577565120728037852.html (September 19, 2013).

For the exclusive use of R. Ahmed, 2022.

This document is authorized for use only by Rashik Ahmed in FIN 9858 Summer 2022 taught by RHONDA HALPERN, CUNY – Baruch College from Jun 2022 to Jul 2022.

Barclays and the LIBOR: Anatomy of a Scandal ETH-03

p. 4

HOW THE RATE-RIGGING WORKED

A ream of evidence was brought forth from the start of the FSA investigation into Barclays

LIBOR rigging in 2010 to the settlement in 2012. The hearings that followed Barclays’

settlement provided insights into the culture of the bank and the psychology of the key actors.

The First Phase: Helping Traders

Efforts by individual Barclays traders to manipulate the LIBOR rate were conducted with no

attempt at secrecy; on the contrary, they were made in person, by e-mail, and via instant

messaging. 13

Traders sometimes made notes in their electronic calendars to remind themselves

what request to submit the next day. One derivatives trader shouted across the Euro Swaps Desk

to ensure his request did not conflict with those of his colleagues. 14

Occasionally, traders

discussed specific requests with their desk managers. 15

The “vast majority” of requests came

from traders on Barclays’ New York Interest Rate Swaps Desk, in New York and London, and

involved the U.S. dollar LIBOR. 16

A report by the U.S. Commodity Futures Trading

Commission (CFTC) concluded that “Barclays’ violative conduct involved multiple desks,

traders, offices and currencies, including United States Dollar (“U.S. Dollar”), Sterling, Euro and

Yen. The wrongful conduct spanned from at least 2005 through at least 2009, and at times

occurred on an almost daily basis.” 17

Barclays’ derivatives traders also sometimes tried to influence the LIBOR submissions of other

banks by asking external traders to pass on requests to their own banks’ submitters. 18

Likewise,

traders helped colleagues who had left for other banks by accepting a request to alter the LIBOR

rate and passing it on to Barclays’ submitters. 19

Sometimes the trades that led to requests for

specific LIBOR submissions were intended to benefit the individual trader and sometimes they

were intended to benefit the bank.

Barclays’ LIBOR rate submissions were made through Barclays Capital’s London Money

Market Desk. According to the CTFC, the senior LIBOR submitter was considered an expert on

U.S. dollar money markets and had more than 25 years of experience in this area.

The FSA cited the following examples of traders’ requests for LIBOR manipulation:

Trader C requested low one-month and three-month US dollar LIBOR

submissions at 10:52 am on 7 April 2006 (shortly before the submissions were

due to be made); “If it’s not too late low 1m and 3m would be nice, but please feel

free to say “no”… Coffees will be coming your way either way, just to say thank

you for your help in the past few weeks.”

13

Commodity Futures Trading Commission, op. cit., p. 8 (September 19, 2013). 14

House of Commons Treasury Committee, Fixing LIBOR: some preliminary findings, Section 35

http://www.publications.parliament.uk/pa/cm201213/cmselect/cmtreasy/481/48103.htm (September 19, 2013). 15

Commodity Futures Trading Commission, op. cit., p. 8 (September 19, 2013). 16

Ibid. 17

Commodity Futures Trading Commission, op. cit., p. 2 (September 19, 2013). 18

House of Commons Treasury Committee, Fixing LIBOR: some preliminary findings, Section 31,

http://www.publications.parliament.uk/pa/cm201213/cmselect/cmtreasy/481/48103.htm (September 19, 2013). 19

Commodity Futures Trading Commission, op. cit., p. 3 (September 19, 2013).

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This document is authorized for use only by Rashik Ahmed in FIN 9858 Summer 2022 taught by RHONDA HALPERN, CUNY – Baruch College from Jun 2022 to Jul 2022.

Barclays and the LIBOR: Anatomy of a Scandal ETH-03

p. 5

On 26 October 2006, an external trader made a request for a lower three-month

US dollar LIBOR submission. The external trader stated in an email to Trader G

at Barclays “If it comes in unchanged I'm a dead man”. Trader G responded that

he would “have a chat”. Barclays’ submission on that day for three month US

dollar LIBOR was half a basis point lower than the day before, rather than being

unchanged. The external trader thanked Trader G for Barclays’ LIBOR

submission later that day: “Dude. I owe you big time! Come over one day after

work and I'm opening a bottle of Bollinger.” 20

However, for the most part, requests to manipulate the LIBOR were evidently too ordinary to

merit champagne, or even coffee. The CFTC cited the following internal emails in its report: 21

“WE HAVE TO GET KICKED OUT OF THE FIXINGS TOMORROW!! We

need a 4.17 fix in 1m (low fix) We need a 4.41 fix in 3m (high fix)”

– November 22, 2005, senior trader in New York to trader in London

“Your annoying colleague again … Would love to get a high 1m Also if poss a

low 3m… if poss … thanks”

-February 3, 2006, trader in London to submitter

Responses by the submitters, as reported by the CTFC, included the following:

“Always happy to help, leave it with me, Sir.”

-March 20, 2006, submitter’s response to a request

“Done…for you big boy…”

-April 7, 2006, submitter’s response to swaps trader requests for low one-

month and three-month U.S. dollar LIBOR

The FSA reported that on March 13, 2006, the following e-mail exchange took place

between a trader and submitter: 22

Trader C: “The big day [has] arrived… My NYK are screaming at me about an

unchanged 3m libor. As always, any help wd be greatly appreciated. What do you

think you’ll go for 3m?

Submitter: “I am going 90 altho 91 is what I should be posting”.

Trader C: “[…] when I retire and write a book about this business your name will

be written in golden letters […]”.

Submitter: “I would prefer this [to] not be in any book!”

The Second Phase: Appearing Strong During the Crisis

20

House of Commons Treasury Committee, Fixing LIBOR: some preliminary findings, Section 32

http://www.publications.parliament.uk/pa/cm201213/cmselect/cmtreasy/481/48103.htm (September 19, 2013). 21

Commodity Futures Trading Commission, op. cit., pp. 9-10 (September 19, 2013). 22

Financial Services Authority, “Final Notice, To Barclays Bank, PLC,” op.cit., Section 59.

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Barclays and the LIBOR: Anatomy of a Scandal ETH-03

p. 6

The second phase of LIBOR manipulation occurred during the credit crisis of 2007-2008, when

analysts began to look at banks’ LIBOR submissions as a means of gauging their financial

health. On September 3, 2007, Bloomberg published an article called “Barclays Takes a Money

Market Beating,” noting that Barclays’ LIBOR submissions were high compared to other banks

and asking, “So what the hell is happening at Barclays and its Barclays Capital securities unit

that is prompting its peers to charge it premium interest rates in the money market?” 23

Barclays’

senior managers were unhappy about the negative publicity, using the term “head above the

parapet” to describe what happened when Barclays’ LIBOR submission was high relative to

other banks. According to former Barclays Chairman Martin Agius, the concern was that

…people might falsely or incorrectly conclude that we were having more trouble

funding than we actually were. And again, to put this into context, anybody who

was not on the bridge of a bank during the financial crisis—and many others

besides—who says it was not terrifying was not there. These were very difficult

times and we were very nervous that we may be misinterpreted by the market as

to our financial strength. 24

Submitters were thus instructed that Barclays should avoid unwanted market and media scrutiny.

According to the FSA Final Notice, “Senior management’s concerns in turn resulted in

instructions being given by less senior managers to Barclays’ submitters to reduce LIBOR

submissions in order to avoid further negative media comment. The origin of these instructions

is unclear.” 25

Submitters were advised that Barclays’ rates should be within ten basis points of

those made by other banks. Discussions regarding the rate to be submitted were recorded in

numerous phone calls and emails.

Exhibit 2, from The Guardian, shows for the time period 2007-2008 Barclays’ LIBOR

submissions (in red) and the fix based on all banks’ submissions (in blue). It shows that

Barclays’ submissions were typically a bit above the fix, and noticeably higher in August and

December 2007, as well as during the height of the financial crisis in late 2008.

WHO KNEW WHAT WHEN

Despite the extensive trail of e-mails and text messages documenting LIBOR manipulation, there

was substantial disagreement about who within Barclays was aware of what was happening, as

well as who bore ultimate responsibility. Another important question was whether top Barclays

officials had failed to implement adequate internal controls to prevent misconduct.

Oversight of Individual Traders

Barclays consistently denied that anyone in a senior position was aware of the efforts made by its

derivatives traders to manipulate the LIBOR. In a letter to the House of Commons Treasury

Committee, Diamond wrote “the authorities found no evidence that anyone more senior than the

23

House of Commons Treasury Committee, Fixing LIBOR: some preliminary findings, Section 42

http://www.publications.parliament.uk/pa/cm201213/cmselect/cmtreasy/481/48103.htm (September 19, 2013). 24

House of Commons Treasury Committee, Fixing LIBOR: some preliminary findings, Volume 2, Q649,

http://www.publications.parliament.uk/pa/cm201213/cmselect/cmtreasy/481/481ii.pdf (September 19, 2013). 25

Financial Services Authority, “Final Notice, To Barclays Bank, PLC,” op.cit.,Paragraph 14.

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Barclays and the LIBOR: Anatomy of a Scandal ETH-03

p. 7

immediate desk supervisors was aware of the requests by traders, at the time that they were

made.” 26

Some MPs expressed incredulity over this claim while questioning Diamond:

John Mann: … Nobody came to you, not even those people who had refused to

act criminally but had been asked to do so? You said to Mr. Garnier that some did

and some didn’t. So even those who had refused to act improperly did not come

and tell you—that never got to you during that three-year period?

Bob Diamond: Well, they didn’t act improperly. 27

The FSA noted “LIBOR issues were escalated to Barclays’ Investment Banking compliance

function (“Compliance”) on three occasions during 2007 and 2008. In each case Compliance

failed to assess and address the issues effectively.” 28

An external review commissioned by

Barclays concluded that individual employees who were concerned about Barclays’ practices

were expected to fend for themselves, and received little backing from either human resources

officers or senior management.

During the Credit Crisis

Barclays did not argue that senior managers were unaware of the second phase of manipulation

that occurred during the credit crisis. Indeed, suspicions existed even outside Barclays.

On May 29, 2008, the Wall Street Journal (WSJ) published an analysis of LIBOR rates, and

concluded that 15 of the 16 banks were understating their rates. The banks’ rates appeared to be

artificially similar to each other, which was strange given the fact that some of the banks were

much weaker than others, and thus at a higher risk of default. The newspaper quoted Professor

Darrell Duffie of the Stanford GSB as calling the rates “far too similar to be believed.” However,

in the study, Barclays was far from the worst offende

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