Friday 29 June 2012

The Barclay market scandal

Barclays market manipulation scandal spreads
More global banks are being investigated for the alleged financial market manipulation that led to fines of $US453 million against Barclays Bank, British Treasury chief George Osborne said today, driving financial stocks lower.

29 June, 2012

The day before, US and British regulators fined Barclays for manipulating the interest rate the London interbank offered rate (LIBOR) to its advantage between 2005 and 2009. The rate is used to price mortgages and consumer loans.

Osborne said Barclays was not the only bank to be involved in market fixing. Beyond the UK, there are also investigations in several countries involving numerous global banking groups.

The banks' share price fell sharply as investors expected hefty fines and tighter regulation. Barclays shares closed down 15.5 per cent, RBS 11.5 per cent, HSBC 2.6 per cent and Lloyds Banking Group 3.9 per cent.

Britain's Financial Services Authority cited evidence that Barclays traders were, in some cases, in touch with people in other banks.

"Banks were clearly acting in concert," said Andrew Tyrie, a British lawmaker who chairs the influential Treasury Committee in the House of Commons. "I fear it's not going to be the end of the story, that we are going to find that other banks have been involved."

Tyrie said his committee would summon Barclays chief executive Bob Diamond to explain what happened at the bank.

Though Diamond has decided to waive his 2012 bonus in the wake of the fines, he's facing calls to step down.

"If Bob Diamond had a scintilla of shame, he would resign," said Matthew Oakshott, a member of the House of Lords. "If Barclays' board had an inch of backbone between them, they would sack him."

Prime Minister David Cameron, when asked whether Diamond should resign, said he thinks "the whole management team have got some serious questions to answer. Let them answer those questions first."

The massive fines are unlikely to be the end of the pain for Barclays. The cost of lawsuits related to the LIBOR scandal will likely be bigger, said Sandy Chen, banking analyst at Cenkos Securities.

"Since Royal Bank of Scotland, HSBC and Lloyds Banking Group have also been named in lawsuits, we expect they will also face significant fines and damages. We are penciling in multi-year provisions that could run into the billions," Chen said.

The LIBOR is an average rate set by banks each morning that measures how much they're going to charge each other for loans. That rate, in turn, affects returns on complex products such as interest rate derivatives contracts.

"These contracts may sound exotic but they are the bread and butter of our financial system and are used by businesses and public authorities every day, and they affect the mortgage payments and loan rates of millions of families and hundreds of thousands of firms, large and small," Osborne said.

The US Justice Department said Barclays would not face criminal prosecution, subject to certain conditions, but individual employees or officers could be prosecuted.

Diamond waived any bonus for this year, as did finance director Chris Lucas, chief operating officer Jerry del Missier and Rich Ricci, the chief executive of corporate and investment banking. Diamond said the decision reflected "our collective responsibility as leaders."

Martin Taylor, who was CEO of Barclays between 1995 and 1998, said the bank's board will have to make a decision whether Diamond can carry on in his post.

Though Taylor does not believe Diamond ordered anyone to fiddle the rates, and thinks Diamond should stay if he can "help clean out the stables," he told BBC radio that only the board can make that judgment.

The traders involved in the manipulations worked in Barclays Capital, the investment bank which Diamond headed between 2005 and 2009.

Former Barclays chief Taylor said he was confident that Diamond hadn't sanctioned the misbehavior in the unit, but added that the company's culture might have been a factor behind the misdemeanors.

"Bob runs an extraordinarily competitive and aggressive ship, and that is one reason why Barclays Capital has been very successful in the first decade of the century," Taylor said.

"And I think that when people are pushed to go to the limit, you know what traders are like, they sometimes go beyond it. They don't need to have an instruction from headquarters to go beyond it, they think it is what the bank might expect, perhaps."

"Somebody at senior level somewhere will certainly have known. I can't believe that Barclays haven't identified who that is," Taylor added.

Rotten to the Core: Barclays Paying $453 Million to Settle Libor Probe

June 28th, 2012

Via: Reuters:

U.K. bank Barclays will pay $453 million to U.S. and British authorities to settle allegations that it manipulated key interest rates, increasing pressure on other banks to cooperate in a probe that could cost the financial industry billions of dollars.

The settlement raises fresh questions about the reliability of the London interbank offered rate, or Libor, which underpins some $360 trillion of loans and financial contracts.

The attempted manipulation, which according to authorities took place from 2005 through 2009, meant that millions of borrowers paid too little or too much interest on their debt.
The U.S. government implicated senior executives at Barclays in its settlement. It cited reams of emails that showed how the bank sought to move Libor rates to profit on trades and to hide its high borrowing costs during the financial crisis.

Barclays Chief Executive Bob Diamond acknowledged on Wednesday that the settlement would damage customer trust in the bank. He said he and other senior executives would forgo their bonuses this year. Much of the improper trading and manipulation occurred under the watch of Diamond, a fixed-income trader who replaced John Varley as CEO in 2011.

Libor underlies everything from derivatives trades to U.S. consumer credit card rates to loans as far afield as those financing Turkish phone networks. Barclays also tried to manipulate Euribor, a separately managed series of euro-denominated rates.

Exclusive: Banks Braced For New Mis-selling Scandal
The FSA is set to reveal evidence that small businesses have been victims of inappropriate selling of interest rate swap products.

By Mark Kleinman, City editor

28 June

Barclays will tomorrow be drawn into another huge City mis-selling scandal that threatens to intensify the pressure on Bob Diamond, its under-fire chief executive.

I can reveal that the Financial Services Authority (FSA) is preparing a statement revealing it has uncovered evidence that many small business customers (SMEs) were the victims of inappropriate selling of interest rate swap products and that the major high street banks will write to every customer who was sold them.

The City regulator is in talks today with the major banks about its proposed statement, which is being scheduled for tomorrow morning. It could lead to another compensation bill for the country’s biggest banks running potentially to hundreds of millions or even billions of pounds.

I’m also told that the banks may agree to a moratorium on the sale of the swaps - although it is unlikely that many people will be buying them at the moment given where interest rates are - and to pursuing customers who have been left facing large bills from the ultra-low interest rate environment.

I should point out that the details of the FSA statement are still being thrashed out today and that depending on the outcome of the discussions with banks, it may make more limited comments on the issue or proceed to a more formal inquiry.

"It (the content of the FSA’s statement) is still very much a moving target,” an insider at the City regulator told me.

What is beyond doubt is that the FSA has completed an initial review of the sale of the interest rate swap products, which were designed to protect those who bought them against steep changes in interest rates by hedging their exposure to such movements.

Many business owners have complained that they were unfairly saddled with huge penalties from the slashing of interest rates to record lows in the aftermath of the banking crisis.

I have learnt that in recent days the FSA has asked the major high street lenders which sold interest rate swaps – led by Barclays and the taxpayer-controlled Royal Bank of Scotland – to commit to writing to the hundreds of thousands of SME customers who took out these swap products.

The communications with customers will be divided into two categories: those who were sold relatively simple products, who are expected to have the opportunity for their cases to be reviewed; and those who were sold more complex products or were unlikely to have understood the downside risk they were taking on.

As I understand it, under the scenario being discussed by the FSA and the major banks, those who fall into the second category will be told that their case will be reviewed by an independent assessor and that they will be compensated appropriately if there is evidence of mis-selling.

The compensation would be calculated from the difference between the loss suffered by a customer and the cost of a simple fixed-rate loan from the same bank.

To be clear, derivatives products of this nature by definition carry a financial risk if rates move sharply in the opposite direction to that which is being insured against.

The conclusion that the FSA has uncovered new evidence of misselling deals a devastating blow to the banking industry in the aftermath of yesterday’s £290m fine imposed on Barclays for fixing the key benchmark interest rate Libor.

The FSA and the major banks declined to comment.

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