The Libor Scandal: A Summary
Barclays Bank has been fined a record £290 million for trying to manipulate lending rates. US financial regulators and the UK’s Financial Services Authority (FSA) both imposed fines on the bank – £59.5m and £230m respectively – after it was discovered that several individuals had attempted to manipulate the Libor (London Interbank Offered Rate). This vital interest rate affects mortgages, credit cards and loans, meaning that many may have found themselves being charged more than necessary by the bank.
Director of enforcements at the FSA, Tracey McDermott explained that “Libor is an incredibly important benchmark reference rate, and it is relied on for many, many hundreds of thousands of contracts all over the world. The market needs to have confidence that those who are involved in submitting numbers to set Libor are thinking about the integrity of the market, and confidence in the market, and not their own interests.”
Between 2005-2008 those involved tried to persuade the staff in charge of submitting the banks own lending rates to use figures that would produce a profit for the bank. During 2007-2009, when the banking crisis was at its peak, the staff put in low figures to make it appear that Barclays was not in trouble and so having to borrow money at higher rates than other banks. The staff in question sought to make Barclays appear more secure during the recession in order to make a profit. This involved colluding with other banks, who may also find themselves facing similar penalties.
At the end of trading on Thursday 28th June, the day after the scandal was uncovered, shares in Barclays had fallen by 15.5%. Other banks saw a similar trend, with RBS shares falling 11.5%, Lloyds 3.9% and HSBC 2.6%.
The FSA were concerned that this seemed to be an “accepted culture” amongst some members. There is a substantial amount of evidence that implies that this was the case, including emails and instant messages.
Several Barclay executives, including chief exec Bob Diamond, all agreed to give up their annual bonus this year in light of this discovery. Many shareholders however were not satisfied by this and said that all bonuses given out during the fixing period should be recalled. Even though he waived his bonus and while there was no evidence that he had been involved himself, many called for Diamond’s resignation despite the fact that, in the first quarter of 2012, Barclays turned over a profit of £2.45bn.
Initially Diamond refused to submit to such calls. He blamed a “small number” of staff and in a memo to his employees stated that, “I am disappointed because many of these behaviours happened on my watch. It is my responsibility to make sure that it cannot happen again.” However Diamond resigned on 3rd July due to external pressure on Barclays, which he said risked “damaging the franchise”. Head of the Labour party, Ed Miliband called the decision “necessary and right”.
Diamond’s resignation came after that of the bank’s chairman, Marcus Agius, who resigned on Monday saying that, “The buck stops with me and I must acknowledge responsibility by standing aside.” Both were still to appear before the Treasury Committee to answer questions from MPs in regards to the scandal. David Cameron said that Barclays had “serious questions to answer”. Diamond gave his evidence on Wednesday, and Agius’ has been postponed till next week.
When facing the committee, Diamond said that he “loved” Barclays, and referred to the actions of those responsible as “reprehensible”. Chairman of the committee, Andrew Tyrie, deemed parts of Diamond’s evidence “implausible”, saying that, “We learnt that Bob Diamond says he didn’t know anything about this until about month ago, which I find rather surprising.”
Diamond was not alone in facing questions over the affair. Chancellor George Osborne told the Spectator that those around Gordon Brown during his time in Downing Street had “questions to answer”, in regards to claims from Barclays that “senior Whitehall figures” had leaned on them to submit low Libor figures. He made it clear that this included his Labour counterpart, Ed Balls. Balls denied such accusations, calling them “cheap, partisan and desperate”, and demanded an apology. According to Osborne’s aides, the chancellor now accepts that Balls was not involved.
On 5th July, MPs voted on the type of inquiry that will be held into the scandal. Government ministers were leaning towards a parliamentary inquiry, whereas Labour called for a more Leveson-type public inquiry held by a judge, independent of Parliament. Osborne pointed out that an inquiry held by Parliament would produce results “over the next few months, instead of waiting for a decade after the scandal itself to get some answers”. However, Ed Miliband stated that, “The last thing the public want is a sense that the establishment is trying to cover it up and sweep it under the carpet”. In the end, it was a parliamentary inquiry that was backed with 330 votes to 226.
Deputy Prime Minister, Nick Clegg, has labelled the banking industry as a source of “embarrassment”. The fate of Barclays’ reputation now hangs in the balance, as the bank looks for a replacement for Diamond that can regain public trust. However crisis management consultant, John Hurtley, said that, “It amazes me how quickly companies like this can bounce back. They are so big. But unless the government inquiry really gets to the bottom [of this scandal] Barclays can’t afford any more damage to its reputation.”