The Biggest Banking Scam Ever

Published in Investing on 29 June 2012

Banks fiddling inter-bank rates could face claims amounting to tens of billions of pounds!

British bank Barclays (LSE: BARC) is dead centre of a storm involving the manipulation of inter-bank lending rates.

Big fines for Barclays

The big boys at Barclays have been very naughty. The bank has been fined £59.5 million by City watchdog the Financial Services Authority (FSA) for manipulating a benchmark interest rate known as Libor (the London Inter Bank Offered Rate). By agreeing to settle at an early stage, Barclays got a 30% discount on what would otherwise have been an £85 million penalty.

In misconduct described as "serious, widespread and extended over a number of years", the FSA said that Barclays' bad behaviour involved a considerable number of employees. Hence, the FSA had no choice but to hand Barclays the largest fine ever levied in the regulator's history.

Worse still, American regulatory authorities slapped even larger fines on the bank. The US Commodity Futures Trading Commission imposed a penalty of $200 million on Barclays in settlement of attempted manipulation and false-reporting charges. Also, in an agreement with the US Department of Justice, Barclays admitted misconduct and agreed to pay a further fine of $160 million.

In all, these three hefty fines total around £290 million, or roughly 2.4p for each of Barclays' 12.2 billion shares in issue.

The great Libor fiddle

What Barclays' staff did was remarkably simple.

To help the bank's trading positions between 2005 and 2009, and most notably during the global financial crisis of 2007-09, the bank made false submissions to the Libor-setting committee, which agrees rates daily in London.

At the request of its own traders of interest-rate derivatives, Barclays made false submissions relating to Libor and Euribor (the eurozone benchmark rate). By doing this, Barclays personnel aimed to help their trading colleagues to profit by manipulating Libor.

Rigging the world's leading benchmark for interest rates is pretty serious stuff. Indeed, in the words of the FSA, "Barclays' behaviour threatened the integrity of the rates, with the risk of serious harm to other market participants".

As a result, Bob Diamond, Barclays' chief executive, has agreed to forego his yearly bonus in 2012 (it was £2.7 million for 2011), as have senior executives Chris Lucas, Jerry del Missier and Rich Ricci.

Many Libor lawsuits to come

In other market-rigging scandals, it is very rare to see only one party involved. Indeed, when investment bankers see their rivals making money hand over fist, they are all too keen to board this bandwagon -- even if the actions involved are banned.

Thus, these fines handed down to Barclays are surely only the tip of the iceberg. There's an old saying that goes: "There's never only one cockroach under the fridge", and the same warning applies to bad bankers.

Therefore, I expect other banks -- in the UK, US and elsewhere -- to be engulfed by this scandal. If any of the global banks, such as HSBC (LSE: HSBA), JP Morgan Chase (NYSE: JPM.US) or Citigroup (NYSE: C.US) admit similar charges, then their fines could dwarf those levied on Barclays.

Furthermore, although Barclays has settled with UK and US regulators, there will be many more civil -- and even criminal -- lawsuits in the pipeline. This threat should trouble shareholders in HSBC, Lloyds Banking Group (LSE: LLOY) and Royal Bank of Scotland (LSE: RBS), as all three British banks have been named in Libor lawsuits.

Sick news for shareholders

What is truly breath-taking is the sheer scale of this fraud.

According to one estimate, around $350 trillion of lending and derivatives is priced off Libor. Thus, if misconduct by banks caused Libor to increase by a mere one tenth of one basis point (0.001%), this amounts to $35 billion a year in extra interest.

One official claims that 20 other banks helped to rig interest rates and that Barclays is poised to 'blow the whistle' on wrongdoing at its co-conspirators. It's also likely that criminal charges could be brought against the ringleaders of this worldwide fraud.

Due to the vast scale of this illegal activity, Libor lawsuits, fines and damages could be an existential threat to Barclays and other banks. Shareholders should forget about the damage to banks' reputations, which are already in the gutter. Instead, they should worry about the very future of the banks involved.

Think about this: class-action lawsuits in the US and mass lawsuits in the UK from mortgage borrowers, loan customers and millions of businesses, all of which paid more interest because of this fiddling of Libor. Scary stuff, agreed?

Bank shares slammed

With this scandal now out in the open, spooked bank shareholders raced for the exits.

Here's how the shares of the Big Four banks have performed since news of these settlements broke on Thursday (from largest to smallest fall):

BankWeds closeThur closeChange (%)

Source: Yahoo! Finance UK, 29/06/12

As you can see, Barclays and RBS shares got hammered on Thursday, losing nearly 16% and 12% respectively. Lloyds got away with a 4% drop, while HSBC slid less than 3%.

Shunning bank shares

Even five years after the credit crunch arrived, the banking world is still not back to 'normal', which is why I avoid UK banks like the proverbial plague. I don't own any bank shares today and have bought none since 2007.

Britain's biggest investor, Neil Woodford -- who manages £20 billion of our money for Invesco Perpetual -- also shuns bank shares. To find out which great British businesses Woodford is buying, read "Eight Shares Britain's Super-Investor Owns". For more about these eight money-making machines -- and Woodford's magnificent mind and methods -- download your free copy of this report today.

Without doubt, the rigging of Libor is shaping up to be the most serious financial scandal of the 21st Century. Indeed, if criminal charges succeed against any bank involved, then they could well spell the end of that institution. So, watch this space...

More from Cliff D'Arcy:

> Cliff does not own any of the shares mentioned in this article.

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F958B 29 Jun 2012 , 4:02pm

What would surprise me, is if the *only* thing involved was LIBOR.

I think it's far more likely to extend into almost every asset class on the planet, on multiple occasions, over many years.

Manipulation of prices and/or sentiment is a normal part of markets and probably always will be - the regulators are no more use than a chocolate teapot; the bankers are usually far smarter than the bureacratic government paper shufflers tasked with trying to keep the game fair for all participants.

I just live with the manipulations and try to take advantage of the unsustainable pricing it offers.

kiffberet 29 Jun 2012 , 4:07pm

Sounds bad, but how is Libor actually calculated? If its purely the perseption of a banks strengh that determines it, or if individuals can actually influence the Libor value, then the Libor rate aint worth spit any way, and the crime isnt' as bad as it seems.
Granted a few clients got sucked in, but, hey, you listen to a banker, you get burnt!

kiffberet 29 Jun 2012 , 4:08pm

Excuse mny grammar above. I've had a couple...

Avalaugh 29 Jun 2012 , 5:20pm

drinking and investing make a bad combination, lol

CunningCliff 29 Jun 2012 , 5:36pm

"Son, never trust a man who doesn't drink because he's probably a self-righteous sort, a man who thinks he knows right from wrong all the time. Some of them are good men, but in the name of goodness, they cause most of the suffering in the world. They're the judges, the meddlers. And, son, never trust a man who drinks but refuses to get drunk. They're usually afraid of something deep down inside, either that they're a coward or a fool or mean and violent. You can't trust a man who's afraid of himself. But sometimes, son, you can trust a man who occasionally kneels before a toilet. The chances are that he is learning something about humility and his natural human foolishness, about how to survive himself. It's damned hard for a man to take himself too seriously when he's heaving his guts into a dirty toilet bowl."

Cliff :0)

ANuvver 29 Jun 2012 , 6:23pm

Thanks for the tip on Crumley - "Chandler meets Hunter S" sounds like just my cup of scotch. Sadly, I hardly read fiction anymore, but then to paraphrase Tom Lehrer, who needs fiction when the real world throws up the likes of Liebor?

Owning DGE is a useful offset against my annual Guinness bill...

potato1066 30 Jun 2012 , 8:30pm

Why fine banks? Senior bosses will take notice when they are in prison and/or disqualified.

ChinaRory 01 Jul 2012 , 6:54am

I am in total agreement here with potato1066.
A fine on the bank ( and where does this money actually go anyway ? ) is not in anyway a punishment on those who devised and perpetuated the scams.
Regardless of personal feelings about the senior managment and BOD I think one has to at least tip ones hat to them for not accepting their bonus.Whether they did or should have known is a differnt matter.
Anyone knowingly, or by default involved in this and any other scam should face criminal prosecution and be barred for life from being involved in the financial sector.
The fine on the bank,at a 30% discount for mix of good behaviour (??), coming clean ( 5 years after it started ) and promising not to do exactly the same thing again ( unless much better dressed up ) presummably, probably represent about 3 or 4% of what they actually made out of it.
The biggest loser of course are the shareholders and taxpayers.
This is peanuts to the banks, allows them to set aside funds for future litigation and claims ( both concurrently running with the last lot ) and no doubt somehow it will all be deductable against tax in some guise.
I'll have a pint of Guiness with that thank you landlord.

fedupwithbanks 02 Jul 2012 , 2:34pm

Just proves what I've believed for years, that the financial services industry is institutionally corrupt, and you trust them at your peril.

Those people involved need to be thrashed within an inch of their lives and don't tell me this has not emanated from the very top.

We haven't moved far from Victorian values have we?

lizzyk 02 Jul 2012 , 2:44pm

I read in the Times today that Barclays are saying that Paul Tucker (tipped to take over from Mervyn King) from the Bank of England encouraged the Libor manipulation practise. Needless to say the Bank of England are denying this.
Also I understand the fine goes back to the FSA so it will reduce the yearly payments by the banks etc. I think it should go to the Treasury if there are any more fines, which I am sure there will be.

hstedham 02 Jul 2012 , 2:55pm

You talk about litigation re lobor manipulation.

How is any one going to work out if it was manipulated on a particular day and by how much up or down and whether a borrower lost out and by how much.

sippquixote 02 Jul 2012 , 4:03pm

Conspiracy to Defraud Contrary to Common Law

It is an offence contrary to the common law for two or more persons to agree to embark on a course of conduct which, if the agreement is carried out in accordance with their intentions, will necessarily amount to or involve some third party being deprived of some thing which is his or to which he is or would be or might be entitled. The offence is extremely wide and even agreements which might have the effect of injuring a third party's proprietary rights in copyright material have been held to constitute the offence. (Scott v Metropolitan police commissioner [1975] ac 819).

Reading the above, I cannot see any way that the senior members of Barclays could avoid a successful prosecution......unless of course, Bob Diamond uses his often publicised friendship with David Cameron to pressurise the SFA to agree not to prosecute.

I await developments in our very sleazy society!

davidnrobyn 03 Jul 2012 , 3:15am

When I saw the amount of the fine, my first reaction was laughter. 59.5 million? That's chump change, walking-around money. C'mon, now.

sippquixote 03 Jul 2012 , 7:24am

Latest development in our sleazy society:

Yes, it didn't take long!

The Prime Minister has now announced that bankers will be forced to give evidence under oath to an enquiry. Good, you say.
However don't forget that Art. 6 of the Human Rights Act prevents the subsequent prosecution of anyone forced to give evidence under oath.

With one bound they were free!

Thank you David Cameron, your next job is guaranteed in the City.

Paydaydesk 25 Oct 2012 , 11:36am

Each day banks dissapoint more and more consumers. And on a financial market there appear more financing institutions which offer better conditions and treat their consumers better. Some banks have bad reputation. Some treat their consumers wrong, client sometimes just do not feel like a client. As for loans, sometimes requirements are shocking and getting approved a bank loan seem almost impossible. That's why I am not surprised about bank scam. It's time for new financial institutions, where the service is much better.

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