Comment: Libor fiddle outs rotten culture

Paula Dwyer and Francis Wilkinson

You might have missed the latest bank scandal. If so, let us fill you in: on June 27, Barclays, the second-largest UK bank by assets, admitted it deliberately reported artificial borrowing costs from 2005 to 2009.

The false reports were used to set the London interbank offered rate, or Libor, a benchmark that affects the value of trillions of dollars of derivatives contracts, mortgages and consumer loans. The bank agreed to pay a hefty $451 million (R3.7 billion) to settle charges with US and UK regulators, and on Monday its chairman resigned.

Chief executive Robert Diamond, who had earlier agreed to forfeit his bonus, followed the chairman out the door yesterday. In an apology to employees before he decided to resign, Diamond wrote that some of the misconduct occurred on his watch, when he was the head of Barclays Capital, the investment banking unit.

Heads should roll at other banks, too. Regulators and criminal prosecutors, including the US Justice Department, are investigating at least a dozen other lenders to determine whether they colluded to rig the rate. Among them are Citigroup, Deutsche Bank, HSBC Holdings and UBS.

We don’t countenance bank bashing. Nor have we ever called on regulators to bust up big banks. But it is difficult to defend an industry that defrauds the market with fake interest rate figures, thereby stealing from other banks and customers.

Sadly, the Libor case reveals something rotten in today’s banking culture. We hope the investigations expose the bad actors, lead to jail terms for those who knowingly manipulated the market and force out the senior managers and board directors who participated in, or overlooked, such conduct.

Why so exercised? In the Barclays settlement documents, regulators released smoking-gun e-mails that reveal the extent of the dirty dealing between bank traders (looking to protect profits and bonuses) and senior officials in bank treasury units (hoping to convince markets that their banks were not in financial difficulty). The two are not supposed to collude, but it is obvious that the Chinese walls between them come with ladders.

Libor and the Euro interbank offered rate, or Euribor, are benchmark rates determined by bank estimates of how much it would cost them to borrow from one another, in different timeframes and currencies. The banks submit sheets of numbers every weekday morning, London time. An adjusted average of the rates determines the size of payments on mortgages and corporate loans worldwide. The rates also serve as an indicator of the health of the banking system. Because some submissions are not based on real trades, the potential exists for manipulation.

A Barclays banker responsible for reporting borrowing rates was told to make the bank look healthier by not revealing that borrowing costs had risen.

An e-mail he wrote to a supervisor confirms that he complied: “I will reluctantly, gradually and artificially get my libors in line with the rest of the contributors as requested. I will be contributing rates which are nowhere near the clearing rates for unsecured cash and, therefore, will not be posting honest prices,” he wrote, referring to overnight money market rates.

At times, Barclays traders sought to affect rates on dates when interest-rate derivatives contracts settled, to profit more from trades, according to documents made public by the US Commodity Futures Trading Commission.

Here’s an e-mail about the three-month rate from a senior Barclays trader in New York to the London banker who submitted the rates: “Hi Guys, We got a big position in 3m libor for the next three days. Can we please keep the libor fixing at 5.39 for the next few days. It would really help. We do not want it to fix any higher than that. Tks a lot.(sic)”

Bankers submitting rates responded to such requests as if they were routine: “For you, anything,” and “done… for you big boy”, according to the e-mails. Not that the efforts went unappreciated: “Dude. I owe you big time!” one trader wrote to a Libor submitter. “Come over one day after work and I’m opening a bottle of Bollinger.”

Barclays traders also co-ordinated with counterparts from other banks. One Barclays trader wrote to a trader at another bank: “If you know how to keep a secret I’ll bring you in on it, we’re going to push the cash downwards… I know my treasury’s firepower… please keep it to yourself otherwise it won’t work.”

The Libor system, overseen by the British Bankers Association, operates much as it did in the 1980s. Even after the media uncovered evidence of manipulation in 2008, the bank lobby did little to reduce conflicts or improve the veracity of its numbers. The best solution is to end Libor and create a benchmark using data from actual loans.

The real tragedy is the apparent lack of ethics or self-restraint among the people involved. The latest instalment of big-bank follies offers yet more proof that the industry should not be trusted to regulate itself.

Paula Dwyer and Francis Wilkinson are on the Bloomberg View editorial board.