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BUSINESS CASE: ETH-03DATE:11/07/13
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 ome is watching.
-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." In its settlement, Barclays agreed to pay
$453 million in fines and penalties to bank regulators in the U.K.and U.S.4
"Today Business Lecture" delivered in 2011, quoted in Fixing LIBOR: some preliminaryfindings, Paragraph 111,
http://www publications,parliament.uk/pa/cm201213/cmselect/cmtreasy/481/48103.htm (September 19,2013)
In 2012,the number ofbanks on the Libor Panel was increased to 18.
House ofCommons Treasury Committee, Fixing LIBOR: some preliminary findings, Paragraph 7
http://www.publications,parliament uk/pa/cm201213/cmselect/cmtreasy/481/48103.htm(September 19,2013).
This included a $200million civil penalty levied by the U.S. Commodity Futures Trading Commission;a $160
million penalty from the U.S. Department of Justice; and a f59.5 million fine by the U.K. Financial Services
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.
Copyright ◎2013 by the Board ofTrustees of the Leland Stanford Junior University. Publically available cases are
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Barclays and theLIBOR:Anatomy ofa 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 commentator5 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." 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
percent8 Throughout the process, Barclays insisted that it was not alone in is 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.""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 ofNeutralized and Routinized Deviance in
the Financial Services Sector?,"The University ofNew SouthWales, 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).
Robert Reich,"The Wall Street Scandal ofAll Scandals,"July 7,2012, http://www huffingtonpost com/robert-
reich/libor-wall-street b 1656665.html(September 19,2013).
Robert Reich,"Wall Street Sleaze Keeps Growing,"July 14,2012,http://www.sfeate.com/opinion/article/Wall-
Street-sleaze-keeps-growing-3705814 php(September 19,2013).
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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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. The BBA estimated that $350 trillion of notional swaps and $10
trillion of loans were indexed to the LIBOR." 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, TheNew York Times, July 10,2012,
http://www.nytimes.com/interactive/2012/07/10/business/dealbook/behind-the-libor-scandal. html (September 19,
2013)
Commodity Futures Trading Commission,"In the Matter ofBarclays PLC, Barclays Bank PLC, and Barclays
Capital Inc,"
hitp://www.efte.gov/ucm/grouns/nublic//@lrenforcementactions/documents/legalpleading/enfbarclaysorder062712.p
1晋2p.5(September 19,2013).
Kirsten Grind,"What Libor Means for You,"The Wall Srreet Journal, August 3, 2012,
hitp://onlinewsi.com/article/SB10000872396390443545504577565120728037852.html(September 19,2013).
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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.3 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. Occasionally, traders
discussed specific requests with their desk managers.5 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."!7
Barclays' derivatives traders also sometimes tried to influence the LIBOR submissions of other
banks by asking extenal 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 Im 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."
13Commodity Futures Trading Commission, op.cit, p.8 (September 19,2013).
141House ofCommons Treasury Committee, Fixing LIBOR: some preliminaryfindings, Section 35
http://www.publications.parliament uk/pa/cm201213/cmselect/cmtreasy/481/48103.htm (September 19,2013).
15Commodity Futures Trading Commission, op.cit, p.8(September 19,2013).
161Ibid.
17Commodity Futures Trading Commission, op. cit, p.2 (September 19,2013).
18House ofCommons Treasury Committee, Fixing LIBOR: some preliminaryfindings,Section 31,
http://wwwpublications,parliament uk/pa/cm201213/cmselect/cmtreasy/481/48103.htm (September 19,2013).
19 Commodity Futures Trading Commission, op. cit, p.3 (September 19,2013).
This document is auhorized tor use only in James Cummings's FINC6014,Sem 22023 at Universilty of Sydney tom ju 2023 to dan 2024.
Barclus and the LIBOR: Anatom ofa Scaudul ETH-0 D 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 s21
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
"WE HAVE TO GET KICKED OUT OF THE FIXINGS TOMORROW!! We
need a 4.17 fix in lm(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 lm Also if poss a
low 3m.. if poss .. thanks'
-February 3, 2006, trader in London to submittei
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 plact
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:"[..I 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 Honse ofCommons Treasury Committee, Fixing LIBOR: some preliminary findings, Section 32
http://www,publications,parliamentuk/pa/cm201213/emselect/emtreasy/481/48103.htm (September 19.2013)
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? 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 strength24
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 Barelays' 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 KNEWWHATWHEN
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
23House ofCommons Treasury Committee, Fixing LIBOR: some preliminaryfindings, Section 42
http://www.publications.parliament.uk/pa/cm201213/cmselect/cmtreasy/481/48103.htm (September 19,2013).
24House ofCommons Treasury Committee, Fixing LIBOR: some preliminaryfindings, Volume 2, Q649,
http://www.publications.parliament uk/pa/cm201213/cmselect/cmtreasy/481/48lii.pdf(September 19,2013).
251Financial 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 extermal 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 (WS/) 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 offender—in fact, according to the WSJ's analysis,
two-thirds of the other banks" rates were less believable than those submitted by Barclays.
Government officials had prior warning of the problem. In a December 17, 2007, phone call, an
unidentified Barclays' official told unidentified New York Federal Reserve Bank officials,
"LIBOR's being set too low anyway."29 While that phone call contained no specifics, an April
11, 2008, phone conversation between the New York Fed analyst Fabiola Ravazzolo and an
unidentified Barclays' executive did. Indeed, the Barclays executive acknowledged that the bank
was not honestly reporting its borrowing costs. In the following conversation,"FR" indicates the
Federal Reserve and "B" the unidentified Barclays official:
B: We were putting in where we really thought we would be able to borrow cash
in the interbank market and it was
FR:Mm hmm
26":Text: Bob Diamond Letter to Andrew Tyrie,"Financial Times, June 28,2012,
http://www.ft.com/intl/cms/s/0/1734757a-c157-11e1-8179-00144feabdc0.html#axzz2inPioZLm(November 5,
2013)
271House ofCommons Treasury Committee, Fixing LIBOR: some preliminary findings, Volume 2, Q268,
http://www.publications.parliament.uk/pa/cm201213/cmselect/cmtreasy/481/48lii.pdf (September 19,2013).
28Financial Services Authority,"FinalNotice,To Barclays Bank,PLC,"op. cit, Paragraph 2.
29Chris Isidore,"Barclays admitted false LIBOR reports to Fed in '08,"CNNMoney,July 13,2012,
http://money .cnn.com/2012/07/13/investing/geithner-libor-barclays/index htm (September 19,2013).
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Barclays and the LIBOR:Anatomy of a Scandal ETH-03 p.8
B: Above where everyone else was publishing rates.
FR: Mm hmm.
B: And the next thing we knew, there was um, an article in the Financial Times,
charting our LIBOR contributions and comparing it with other banks and
inferring that this meant that we had a problem raising cash in the interbank
market.
FR: Yeah.
B: And um, our share price went down.
FR: Yes.
B: So it's never supposed to be the prerogative of a, a money market dealer to
affect their companyshare value.
FR:Okay
B: And so we just fit in with the rest of the crowd, if you like.
FR:Okay
B: So, we know that we're not posting um, an honest LIBOR.
FR: Okay. 30
According to a press release by the New York Fed,"Immediately following this call, the analyst
notified senior management in the Markets Group that a contact at Barclays had stated that
underreporting of LIBOR was prevalent in the market, and had occurred at Barclays."3 On June
1,2008, New York Fed President Timothy Geithner sent a memorandum to Mervyn King, the
Governor of the Bank of England, on "Recommendations for Enhancing the Credibility of
LIBOR,"one section of which was entitled "Eliminate incentive to misreport.” This
memorandum was forwarded to the BBA.
British regulators also received information directly from Barclays. On April 17, 2008,a
Barclays manager who was participating in a liquidity call with the FSA made comments that
seemed to reveal the bank had been understating its LIBOR submissions:
..we did stick our head above the parapet last year, got it shot off, and put it back
down again. So, to the extent that, um, the LIBORs have been understated, are we
guilty of being part of the pack? You could say we are. We've always been at the
top end and therefore one of the four banks that's been eliminated. Um, so I
would, I would sort of express us maybe as not clean clean, but clean in
principle.32
Following Government Orders?
A third period of LIBOR manipulation arguably began on October 29,2008, when Bob Diamond
received a phone call from Paul Tucker, the deputy governor of the Bank of England. Diamond
took notes on the call and circulated these by e-mail to John Varley, who was then Barclays
CEO, and Jerry del Missier, then president of Barclays Capital. The e-mail read:
30New York Federal Reserve Bank,"Unofficial Transcript,"April 11,2008,
http://www.newyorkfed org/newsevents/news/markets/2012/libor/April 112008 transcript.pdf, p.5-6 (September
19,2013).
31House of Commons Treasury Committee, Fixing LIBOR: some preliminaryfindings, Section 50,
http://www.publications.parliament uk/pa/cm201213/cmselect/cmtreasy/481/48103.htm (September 19,2013).
321Financial Services Authority,"Final Notice, To Barclays Bank, PLC,"op. cit, Paragraph 131.
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Barclays and the LIBOR:Anatomy of a Scandal ETH-03 p.9
Further to our last call, Mr. Tucker reiterated that he had received calls from a
number of senior figures within Whitehall [i.e., the government] to question why
Barclays was always toward the top end of the Libor pricing.. I asked if he could
relay the reality, that not all banks were providing quotes at the levels that
represented real transactions, his response "oh, that would be worse…."
Mr.Tucker stated the level of calls he was receiving from Whitehall were 'senior'
and that while he was certain we did not need advice, that it did not always need
to be the case that we appeared as high as we have recently.33
Diamond also spoke by phone with del Missier. According to del Missier, Diamond said"the
Bank of England was getting pressure from Whitehall around Barclays—the health of
Barclays—as a result of LIBOR rates, that we should get our LIBOR rates down, and that we
should not be outliers."
Del Missier testified that he perceived this to be an instruction, which he in turn relayed to
Barclays' money markets desk. Diamond, however, testified that he did not believe the phone
call from Tucker had been an"instruction"to lower Barclays'LIBOR submissions and that there
had been"a misunderstanding, or a miscommunication" that had led del Missier to interpret it as
such. Although Diamond evidently considered this post-phone call period to be a third, and
distinct, period of LIBOR manipulation, for which government officials were at least partially
responsible, the U.K. Treasury Committee did not accept this interpretation. It concluded that:
The Committee found Mr. Diamond's attempt to subdivide the later period of
wrongdoing neither relevant nor convincing. It does not appear that the
conversation between Mr. Tucker and Mr. Diamond made a fundamental
difference to Barclays' behavior, given the repeated instances of 'low-balling'
submissions to the LIBOR fixing process by Barclays..covering the year
running up to the phone call between Mr. Tucker and Mr. Diamond35
WHO BENEFITEDATWHOSEEXPENSE
In aJuly 2, 2012, memo to Barclays' staff, Diamond addressed the question of impact. He wrote:
Our customers and clients are particularly concerned about the potential impact of
this behavior on them. Let me be clear: it does not matter if this was perpetrated
by one individual or a handful—it was wrong.
But we must help our customers and clients recognize that on the majority of
days, no requests were made at all. Even when made, the requests were not
331House ofCommons Treasury Committee, Fixing LIBOR: some preliminaryfindings, Section 72,
http://www.publications.parliament uk/pa/cm201213/cmselect/cmtreasy/481/48106.htm (September 19,2013).
34 House of Commons Treasury Committee, Fixing LIBOR: some preliminary findings, Volume 2,Q87,
http://www.publications.parliament uk/pa/cm201213/cmselect/cmtreasy/481/48lii.pdf(September 19,2013).
351House ofCommons Treasury Committee, Fixing LIBOR: some preliminaryfindings, Section 207,
http://www publications,parliament uk/pa/cm201213/cmselect/cmtreasy/481/48103.htm (September 19,2013).
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Barclays and the LIBOR: Anatomy of a Scandal ETH-03
(September 20,2013).
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p.10
always accepted by the submitter, and the attempted adjustments were, on
average, small, typically less than one basis point.
When the ultimate rate was affected is a complex question, especially given the
role of the other banks' submissions. This helps explain why the Department of
Justice concluded that the rate was affected only on"some occasions.…56
Regarding the first phase of manipulation, Diamond insisted that participating traders were not
acting on behalf of Barclays when they submitted rates that would benefit their books. He told a
member of the Treasury Committee,"You said that the traders were acting on behalf of
Barclays. They were acting on behalf of themselves. It is unclear whether it benefited Barclays
but I don't think they had any interest in benefiting Barclays, they were benefiting themselves."
The chairman of Britain's FSA, Lord Turner, testified that it would be difficult—albeit not
impossible—to prove whether individual traders had benefitted from the rate-rigging."That
would be a very complicated thing to do,"he said,"because you would have to work out what
they would have put in when they did not put this in, and then you have to work out what that
would have done to the average."
In relation to the second phase, Diamond stressed in his letter to the Treasury Committee that,
"the authorities found that Barclays reduced its LIBOR submissions to protect the reputation of
the bank from negative speculation during periods of acute market stress."3" He emphasized that
speculation regarding Barclays' liquidity was"unwarranted,""inaccurate,"and "created a real
and material risk that the bank and its shareholders would suffer damage."He concluded:"Even
taking into account of the abnormal market conditions at the height of the financial crisis, and
that the motivation was to protect the bank, not to influence the ultimate rate, I accept that the
decision to lower submissions was wrong.”
AFFIXING BLAME
There are many different viewpoints as to who—or what—is ultimately responsible for the
LIBOR scandal.
According to an external review commissioned by Barclays, the culture of the investment
banking division placed a strong emphasis on delivering desirable results."Many of our
interviewees told us,"the report said,"that while some members of Barclays Capital's
top team inspired and valued loyalty, the team disliked bad news. This all combined to create an
36-BobDiamond's memo toBarclays'staff" The Guardian, July 2,2012,
http://www.guardian.co.uk/business/2012/jul/02/bob-diamond-memo-to-barclays-staff(September 20,2013).
House ofCommons Treasury Committee, Fixing LIBOR: some preliminaryfindings, Volume 2, Q122,
http://www.publications.parliament.uk/pa/cm201213/cmselect/cmtreasy/481/48lii.pdf (September 19,2013).
House ofCommons Treasury Committee, Fixing LIBOR: some preliminaryfindings, Section 28,
http://wwwpublications.parliament uk/pa/cm201213/cmselect/cmtreasy/481/48104.htmtn35 (September 19,2013).
House ofCommons Treasury Committee,"Fixing Libor: Written Evidence,"(Letter to the Chairman ffom Bob
Diamond, ChiefExecutive, Barclays, June 28,2012)
hitp://www parliament uk/documents/commons-committees/treasury/Fixing%20LIBOR%20evidence%202.ndf
Barclays and the LIBOR: Anatomy of a Scandal ETH-03 p.11
environment in which leaders were rarely effectively tested or challenged, contributing to a sense
of ambiguity about what was considered right and wrong."
Diamond, in his memo to Barclays' staff, said "The events revealed last week arose in large part
because we did not have appropriate controls in place. Frankly, we misjudged the risk associated
with the underlying activity." In his testimony, former Barclays chairman Marcus Agius
emphasized that LIBOR submissions were long viewed as low-risk because outliers were
removed and because the rate was historically quite stable.42
The House of Commons Treasure Committee saw things quite differently:
The attempted manipulation of Barclays'LIBOR submissions with the intention
of personal gain continued for four years. It is shocking that it flourished for so
long. Any system may fail for a short period, but compliance at Barclays was
persistently ineffective. Even when Barclays' compliance had indications that
something was awry, it failed to take the opportunity to strengthen the bank's
controls. Nor was there any pressure from senior executives within Barclays to
ensure that effective LIBOR controls were in place... These are serious failures of
govemance within Barclays, for which the board is responsible.43
In its own dissection of the scandal, the financial community and press have put forth a variety of
explanations. Martin Wheatley, the top financial regulator in Britain, argued that a code of
conduct with clear rules, overseen by a regulator with extensive powers, would be sufficient to
correct the problem. The editors of Bloomberg blamed the culture of finance and suggested the
key to changing this was aggressive prosecution of those who had manipulated rates. Some
bankers suggested the scandal resulted from the actions of a few bad individuals, and that once
these people were removed, the system would again function smoothly. In contrast, financial
journalist lan Fraser argued,"Many banks have sought to blame LIBOR rigging on individual
rogue traders,'many of whom have already been fired or suspended. But there is strong
evidence to suggest that, in both phases of LIBOR rigging, the traders were only obeying orders
from more senior investment banking colleagues." And James Surowiecki, writing in the New
Yorker, blamed prety much everybody:"The most striking thing about this scandal is that it was
predictable—the way LIBOR was designed practically invited corruption—yet no one did
anything to stop it.”
40S;alz Review,"An Independent Review ofBarclays' Business Practices, April 2013,Section 8.39,
https://www.salzreview.co.uk/c/document library/eet file?uuid=557994c9-9c7f-4037-887b-
8b5623bed25e&groupld=4705611 (September 19,2013).
41 "Bob Diamond's Memo to Barclays'Staff," The Guardian, July 2,2012,
http://www.guardian.co.uk/business/2012/jul/02/bob-diamond-memo-to-barclays-staff (September 20,2013).
42 House of Commons Treasury Committee, Fixing LIBOR: some preliminary findings, Volume 2, Q648,
http://www.publications.parliament uk/pa/cm201213/cmselect/cmtreasy/481/48lii.pdf(September 19,2013).
43House of Commons Treasury Committee, Fixing LIBOR: some preliminaryfindings,Section 38,
http:/ /www publications, parliament uk/pa/ cm201213/ cmselect/ cmtreasy/481 /48103 . htm (September 19 ,2013) .
44
Jamie Mann,"Rate Rigging Traders to be 'Scapegoats 'as Arrests Imminent,"The Scotish Times,July 23,2012,
http://www.scottishtimes com/rate rigging traders to be scapegoats as arrests imminent (September 20,2013).
451
James Surowiecki,"Bankers Gone Wild,"The New Yorker, July 30,2012,
http://www.newyorker.com/talk/financial/2012/07/30/120730ta talk surowiecki(September 20,2013).
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Barclays and the LIBOR: Anatomy of a Scandal ETH-03 p.12
In the wake of Barclays' LIBOR settlement, Douglas Keenan, a former trader at Morgan Stanley,
published an op-ed in the Financial Times in which he suggested that misreporting of LIBOR
rates may have been common practice since 1991."I talked with some of my more experienced
colleagues about this,"Keenan wrote."They told me banks misreported the LIBOR rates in a
way that would generally bring them profits. I had been unaware of that, as I was relatively new
to financial trading. My naivety seemed to be humorous to my colleagues." y46
AFTERMATH
Investigations into alleged manipulations of the LIBOR by other banks continued after the
Barclays settlement. In December 2012, UBS agreed to pay a $1.5 billion fine—the FSA
deemed UBS offenses "considerably more serious"47 than Barclays' offenses and two former
UBS traders were formally charged. In February 2013, Royal Bank of Scotland was fined $612
million. As of autumn 2013, more than a dozen other banks remained under investigation with
more charges, and settlements, expected to come.
Regulatory authority over the LIBOR was given to the U.K.'s Financial Conduct Authority,
headed by Martin Wheatley, and the FSA was shut down. Responsibility for setting the LIBOR
was taken from the BBA and awarded to NYSE Euronext.48 While the LIBOR would continue to
be set by a surveyed panel of banks, Wheatley tasked Euronext with finding a way to tie the rates
more closely to actual transactions. One possibility suggested was the creation of two parallel
rates, one from surveys and the other transaction-based.
In February 2013, Antony Jenkins—Diamond's successor as Barclays CEO—told the
Parliamentary Commission on Banking Standards that he was "shredding"Diamond's legacy
and working to change Barclays "aggressive"and"self-serving" culture.50 In spring 2013,
Diamond was profiled in the New York Times Magazine. The article, by Andrew Sorkin, called
Diamond's role in the scandal "minimal, and perhaps wildly overblown."1 In discussing the
LIBOR scandal,Diamond told Sorkin:
Do you want the truth? Up until all of this, I didn't even know the mechanics of
how Libor was set. If you asked me who at Barclays submitted the rate every day,
461Douglas Keenan,"My Thwarted Attempt to Tell ofLIBOR Shenanigans,"The Financial Times, July 26,2012,
http://www,ft.com/int//cms/s/0/dc5f49c2-d67b-11e1-ba60-00144feabdcO,htm(September 20,2013).
Jil Treanor,"Two Former UBS Employees Charged in US Over LIBOR,"The Guardian, December 19,2012,
http://www.theguardian .com/business/2012/dec/19/ubs-1bn-libor-payments-to-brokers(September 20,2013).
48Brooke Masters and Philip Stafford,"Scandal-Plagued Libor Moves to NYSE,"The Financial Times, July 9,
2013.http://www.ft.com/intl/cms/s/0/73332222-e87f-11e2-aead-00144feabdc0.html#axzz2e2YIYyAh (September
20.2013)
49Q&AWhat Next for LIBOR?" The Financial Times, July 9,2013, http://www.ft. com/intl/cms/s/0/b861dc76-
e884-11e2-aead-00144feabdc0.html#axzz2e2YTYyAh (September 20,2013).
Martin Robinson,"Barclays will 'shred' Bob Diamond's legacy by slashing bonuses as it is forced to set aside
another flbn for mis-selling scandals," The Daily Mail. February 5,2013,http://www.dailymail co uk/news/article-
2273668/Barclays-shred-Bob-Diamonds-legacy-slash-bonuses-forced-1bn-mis-selling html (September 20,2013).
51 Andrew Ross Sorkin,"Bob Diamond's Next Life," The NewYork TimesMagacine, May 2,2013,
http://www.nytimes.com/2013/05/05/magazine/robert-diamonds-next-life html?nagewanted=all& r=0(September
20,2013).
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Barclays and the LIBOR: Anatomy of a Scandal ETH-03 p.13
I wouldn't be able to tell you. I bet you if you asked any chief executive of any
bank on the street, they would give you the same answer.32
Study Questions
1.What aspect of the first phase of LIBOR manipulation was most ethically problematic:
● The fact that Barclays intentionally falsified its LIBOR submissions?
· The(mis)use of relationships between Barclays' traders and submitters to gain an unfair
advantage?
· The fact that rate manipulation affected millions of people whose mortgages or
investments were tied to the LIBOR?
· The possibility that rate-rigging could undermine public trust in LIBOR and other
comerstones of the global financial system?
2. At least some Barclays traders had good reason to believe that other banks were manipulating
LIBOR submissions in 2005-2006. How do you think this affected the Barclays traders'
behavior? Does it affect your ethical assessment of their behavior?
3. Who is responsible for compliance in an institution in which executives pressure subordinates
to deliver results but don't monitor their actions? What is the role of corporate culture in
ensuring compliance? How should a company handle internal whistleblowing?
4. Is there any ethical distinction between individual traders' manipulation of the LIBOR and
banks' systematic submission of unrealistically low rates during the credit crisis? Why or why
not?
5.Does the fact that governments may have condoned, or even encouraged, banks to understate
their LIBOR submissions in 2007-2008 affect your ethical assessment of Barclays' behavior
during the credit crisis?
6. Can you think of other examples(in finance or in other industries) that mirror the LIBOR
case? What are the common features of LIBOR manipulation and your example?
52 bid.
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Barclays and theLIBOR:Anatomy ofa Scandal ETH-03 p.14
Exhibit 1:LIBOR Manipulation in a"Plain-Vanilla"Interest Rate Swap
Floating Rate: LIBOR+0.2%
Barclays
Fixed Rate: 5.0%
This is a hypothetical example of a"plain vanilla" interest rate swap for $4 billion in loans. It
explains the mechanics of how a Barclays trader could benefit from LIBOR manipulation.
A Barclays trader and a Counterparty agree to a deal with the following terms. At a specified
date in the future
· Barclays pays Counterparty:$4bn x(LIBOR+0.2%)
Counterparty pays Barclays:$4bn x 5%
The resulting net payment from Barclays to Counterparty is:$4bn x(LIBOR-4.8%).
· Note that depending on how interest rates move, this payment can be either positive or
negative. Also note that in this example Barelays benefits from a low LIBOR.
Now the date for the payments arrives. Suppose the other fifteen banks submit the following
rates for the 3-month U.S. dollar LIBOR: 4.810,4.810,4.810,4.810,4.815,4.815,4.815,4.815,
4.815,4.820,4.820,4.820,4.820,4.820,4.830.
When calculating the 3-month U.S. dollar LIBOR, the four highest and four lowest submissions
are tossed out.
Suppose Barclays believes the accurate rate to submit is 4.820.
· If Barclays submits 4.820, the LIBOR is 4.816875, so Barclays must pay $675,000 to
Counterparty
If Barclays submits 4.815, the LIBOR is 4.81625, so Barclays must pay $ 650,000 to
Counterparty
· If Barclays submits 4.810,the LIBOR is 4.815625,so Barclays must pay$625,000 to
Counterparty.
A submission above 4.820 or below 4.810 will have no additional effect on the LIBOR or
Barclays's payments.
With collusion, the effect can be larger. For example, suppose Barclays submits 4.810.Suppose
it also convinces two banks to submit 4.810 rather than 4.815 and convinces a third bank to
submit 4.810 rather than 4.820. Then the LIBOR is 4.813125 and Barclays only needs to pay
$525.000 to Counterparty
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Counterparty
Barclays and the LIBOR: Anatomy of a Scandal ETH-03 p.15
Exhibit 2: Barelays' Head Over the Parapet³
The blue line is Barclays' 3-month U.S. dollar LIBOR submission. The red line is the fix,or
reported LIBOR, based on all banks' submissions. Light grey lines are other individual banks'
submissions.
535Simon Rogers,"Libor Rate Fixing; See Each Bank's Submissions,"The Guardian,July 3,2012,
http://www.theguardian.com/news/datablog/interactive/2012/iul/03/libor-rate-fixing-bank-submissions,
1,2013). Reproduced with permission.
This document is authorized for use only in James Cummings's FINC6014, Sem 22023 at University of Sydney from Jul 2023 to Jan 2024.
(November
BUSINESS CASE: ETH-03DATE:11/07/13
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 ome is watching.
-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." In its settlement, Barclays agreed to pay
$453 million in fines and penalties to bank regulators in the U.K.and U.S.4
"Today Business Lecture" delivered in 2011, quoted in Fixing LIBOR: some preliminaryfindings, Paragraph 111,
http://www publications,parliament.uk/pa/cm201213/cmselect/cmtreasy/481/48103.htm (September 19,2013)
In 2012,the number ofbanks on the Libor Panel was increased to 18.
House ofCommons Treasury Committee, Fixing LIBOR: some preliminary findings, Paragraph 7
http://www.publications,parliament uk/pa/cm201213/cmselect/cmtreasy/481/48103.htm(September 19,2013).
This included a $200million civil penalty levied by the U.S. Commodity Futures Trading Commission;a $160
million penalty from the U.S. Department of Justice; and a f59.5 million fine by the U.K. Financial Services
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.
Copyright ◎2013 by the Board ofTrustees of the Leland Stanford Junior University. Publically available cases are
distributed through Harvard Business Publishing at hbsp.harvard.edu and European Case Clearing House at
ecch.com, please contact them to order copies and request permission to reproduce materials. No part of this
publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by
any means — electronic, mechanical, photocopying, recording, or otherwise — without the permission of the
Stanford Graduate School ofBusiness. Every effort has been made to respect copyright and to contact copyright
holders as appropriate. Ifyou are a copyright holder and have concerns, please contact the Case Writing Office at
owo@gsb.stanford edu or write to CaseWriting Office, Stanford Graduate School ofBusiness, Knight Management
Center, 655 KnightWay; StanfordUniversity, Stanford, CA 94305-5015.
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Barclays and theLIBOR:Anatomy ofa 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 commentator5 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." 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
percent8 Throughout the process, Barclays insisted that it was not alone in is 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.""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 ofNeutralized and Routinized Deviance in
the Financial Services Sector?,"The University ofNew SouthWales, 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).
Robert Reich,"The Wall Street Scandal ofAll Scandals,"July 7,2012, http://www huffingtonpost com/robert-
reich/libor-wall-street b 1656665.html(September 19,2013).
Robert Reich,"Wall Street Sleaze Keeps Growing,"July 14,2012,http://www.sfeate.com/opinion/article/Wall-
Street-sleaze-keeps-growing-3705814 php(September 19,2013).
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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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. The BBA estimated that $350 trillion of notional swaps and $10
trillion of loans were indexed to the LIBOR." 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, TheNew York Times, July 10,2012,
http://www.nytimes.com/interactive/2012/07/10/business/dealbook/behind-the-libor-scandal. html (September 19,
2013)
Commodity Futures Trading Commission,"In the Matter ofBarclays PLC, Barclays Bank PLC, and Barclays
Capital Inc,"
hitp://www.efte.gov/ucm/grouns/nublic//@lrenforcementactions/documents/legalpleading/enfbarclaysorder062712.p
1晋2p.5(September 19,2013).
Kirsten Grind,"What Libor Means for You,"The Wall Srreet Journal, August 3, 2012,
hitp://onlinewsi.com/article/SB10000872396390443545504577565120728037852.html(September 19,2013).
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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.3 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. Occasionally, traders
discussed specific requests with their desk managers.5 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."!7
Barclays' derivatives traders also sometimes tried to influence the LIBOR submissions of other
banks by asking extenal 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 Im 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."
13Commodity Futures Trading Commission, op.cit, p.8 (September 19,2013).
141House ofCommons Treasury Committee, Fixing LIBOR: some preliminaryfindings, Section 35
http://www.publications.parliament uk/pa/cm201213/cmselect/cmtreasy/481/48103.htm (September 19,2013).
15Commodity Futures Trading Commission, op.cit, p.8(September 19,2013).
161Ibid.
17Commodity Futures Trading Commission, op. cit, p.2 (September 19,2013).
18House ofCommons Treasury Committee, Fixing LIBOR: some preliminaryfindings,Section 31,
http://wwwpublications,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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Barclus and the LIBOR: Anatom ofa Scaudul ETH-0 D 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 s21
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
"WE HAVE TO GET KICKED OUT OF THE FIXINGS TOMORROW!! We
need a 4.17 fix in lm(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 lm Also if poss a
low 3m.. if poss .. thanks'
-February 3, 2006, trader in London to submittei
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 plact
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:"[..I 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 Honse ofCommons Treasury Committee, Fixing LIBOR: some preliminary findings, Section 32
http://www,publications,parliamentuk/pa/cm201213/emselect/emtreasy/481/48103.htm (September 19.2013)
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? 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 strength24
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 Barelays' 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 KNEWWHATWHEN
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
23House ofCommons Treasury Committee, Fixing LIBOR: some preliminaryfindings, Section 42
http://www.publications.parliament.uk/pa/cm201213/cmselect/cmtreasy/481/48103.htm (September 19,2013).
24House ofCommons Treasury Committee, Fixing LIBOR: some preliminaryfindings, Volume 2, Q649,
http://www.publications.parliament uk/pa/cm201213/cmselect/cmtreasy/481/48lii.pdf(September 19,2013).
251Financial 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 extermal 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 (WS/) 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 offender—in fact, according to the WSJ's analysis,
two-thirds of the other banks" rates were less believable than those submitted by Barclays.
Government officials had prior warning of the problem. In a December 17, 2007, phone call, an
unidentified Barclays' official told unidentified New York Federal Reserve Bank officials,
"LIBOR's being set too low anyway."29 While that phone call contained no specifics, an April
11, 2008, phone conversation between the New York Fed analyst Fabiola Ravazzolo and an
unidentified Barclays' executive did. Indeed, the Barclays executive acknowledged that the bank
was not honestly reporting its borrowing costs. In the following conversation,"FR" indicates the
Federal Reserve and "B" the unidentified Barclays official:
B: We were putting in where we really thought we would be able to borrow cash
in the interbank market and it was
FR:Mm hmm
26":Text: Bob Diamond Letter to Andrew Tyrie,"Financial Times, June 28,2012,
http://www.ft.com/intl/cms/s/0/1734757a-c157-11e1-8179-00144feabdc0.html#axzz2inPioZLm(November 5,
2013)
271House ofCommons Treasury Committee, Fixing LIBOR: some preliminary findings, Volume 2, Q268,
http://www.publications.parliament.uk/pa/cm201213/cmselect/cmtreasy/481/48lii.pdf (September 19,2013).
28Financial Services Authority,"FinalNotice,To Barclays Bank,PLC,"op. cit, Paragraph 2.
29Chris Isidore,"Barclays admitted false LIBOR reports to Fed in '08,"CNNMoney,July 13,2012,
http://money .cnn.com/2012/07/13/investing/geithner-libor-barclays/index htm (September 19,2013).
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Barclays and the LIBOR:Anatomy of a Scandal ETH-03 p.8
B: Above where everyone else was publishing rates.
FR: Mm hmm.
B: And the next thing we knew, there was um, an article in the Financial Times,
charting our LIBOR contributions and comparing it with other banks and
inferring that this meant that we had a problem raising cash in the interbank
market.
FR: Yeah.
B: And um, our share price went down.
FR: Yes.
B: So it's never supposed to be the prerogative of a, a money market dealer to
affect their companyshare value.
FR:Okay
B: And so we just fit in with the rest of the crowd, if you like.
FR:Okay
B: So, we know that we're not posting um, an honest LIBOR.
FR: Okay. 30
According to a press release by the New York Fed,"Immediately following this call, the analyst
notified senior management in the Markets Group that a contact at Barclays had stated that
underreporting of LIBOR was prevalent in the market, and had occurred at Barclays."3 On June
1,2008, New York Fed President Timothy Geithner sent a memorandum to Mervyn King, the
Governor of the Bank of England, on "Recommendations for Enhancing the Credibility of
LIBOR,"one section of which was entitled "Eliminate incentive to misreport.” This
memorandum was forwarded to the BBA.
British regulators also received information directly from Barclays. On April 17, 2008,a
Barclays manager who was participating in a liquidity call with the FSA made comments that
seemed to reveal the bank had been understating its LIBOR submissions:
..we did stick our head above the parapet last year, got it shot off, and put it back
down again. So, to the extent that, um, the LIBORs have been understated, are we
guilty of being part of the pack? You could say we are. We've always been at the
top end and therefore one of the four banks that's been eliminated. Um, so I
would, I would sort of express us maybe as not clean clean, but clean in
principle.32
Following Government Orders?
A third period of LIBOR manipulation arguably began on October 29,2008, when Bob Diamond
received a phone call from Paul Tucker, the deputy governor of the Bank of England. Diamond
took notes on the call and circulated these by e-mail to John Varley, who was then Barclays
CEO, and Jerry del Missier, then president of Barclays Capital. The e-mail read:
30New York Federal Reserve Bank,"Unofficial Transcript,"April 11,2008,
http://www.newyorkfed org/newsevents/news/markets/2012/libor/April 112008 transcript.pdf, p.5-6 (September
19,2013).
31House of Commons Treasury Committee, Fixing LIBOR: some preliminaryfindings, Section 50,
http://www.publications.parliament uk/pa/cm201213/cmselect/cmtreasy/481/48103.htm (September 19,2013).
321Financial Services Authority,"Final Notice, To Barclays Bank, PLC,"op. cit, Paragraph 131.
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Barclays and the LIBOR:Anatomy of a Scandal ETH-03 p.9
Further to our last call, Mr. Tucker reiterated that he had received calls from a
number of senior figures within Whitehall [i.e., the government] to question why
Barclays was always toward the top end of the Libor pricing.. I asked if he could
relay the reality, that not all banks were providing quotes at the levels that
represented real transactions, his response "oh, that would be worse…."
Mr.Tucker stated the level of calls he was receiving from Whitehall were 'senior'
and that while he was certain we did not need advice, that it did not always need
to be the case that we appeared as high as we have recently.33
Diamond also spoke by phone with del Missier. According to del Missier, Diamond said"the
Bank of England was getting pressure from Whitehall around Barclays—the health of
Barclays—as a result of LIBOR rates, that we should get our LIBOR rates down, and that we
should not be outliers."
Del Missier testified that he perceived this to be an instruction, which he in turn relayed to
Barclays' money markets desk. Diamond, however, testified that he did not believe the phone
call from Tucker had been an"instruction"to lower Barclays'LIBOR submissions and that there
had been"a misunderstanding, or a miscommunication" that had led del Missier to interpret it as
such. Although Diamond evidently considered this post-phone call period to be a third, and
distinct, period of LIBOR manipulation, for which government officials were at least partially
responsible, the U.K. Treasury Committee did not accept this interpretation. It concluded that:
The Committee found Mr. Diamond's attempt to subdivide the later period of
wrongdoing neither relevant nor convincing. It does not appear that the
conversation between Mr. Tucker and Mr. Diamond made a fundamental
difference to Barclays' behavior, given the repeated instances of 'low-balling'
submissions to the LIBOR fixing process by Barclays..covering the year
running up to the phone call between Mr. Tucker and Mr. Diamond35
WHO BENEFITEDATWHOSEEXPENSE
In aJuly 2, 2012, memo to Barclays' staff, Diamond addressed the question of impact. He wrote:
Our customers and clients are particularly concerned about the potential impact of
this behavior on them. Let me be clear: it does not matter if this was perpetrated
by one individual or a handful—it was wrong.
But we must help our customers and clients recognize that on the majority of
days, no requests were made at all. Even when made, the requests were not
331House ofCommons Treasury Committee, Fixing LIBOR: some preliminaryfindings, Section 72,
http://www.publications.parliament uk/pa/cm201213/cmselect/cmtreasy/481/48106.htm (September 19,2013).
34 House of Commons Treasury Committee, Fixing LIBOR: some preliminary findings, Volume 2,Q87,
http://www.publications.parliament uk/pa/cm201213/cmselect/cmtreasy/481/48lii.pdf(September 19,2013).
351House ofCommons Treasury Committee, Fixing LIBOR: some preliminaryfindings, Section 207,
http://www publications,parliament uk/pa/cm201213/cmselect/cmtreasy/481/48103.htm (September 19,2013).
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Barclays and the LIBOR: Anatomy of a Scandal ETH-03
(September 20,2013).
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p.10
always accepted by the submitter, and the attempted adjustments were, on
average, small, typically less than one basis point.
When the ultimate rate was affected is a complex question, especially given the
role of the other banks' submissions. This helps explain why the Department of
Justice concluded that the rate was affected only on"some occasions.…56
Regarding the first phase of manipulation, Diamond insisted that participating traders were not
acting on behalf of Barclays when they submitted rates that would benefit their books. He told a
member of the Treasury Committee,"You said that the traders were acting on behalf of
Barclays. They were acting on behalf of themselves. It is unclear whether it benefited Barclays
but I don't think they had any interest in benefiting Barclays, they were benefiting themselves."
The chairman of Britain's FSA, Lord Turner, testified that it would be difficult—albeit not
impossible—to prove whether individual traders had benefitted from the rate-rigging."That
would be a very complicated thing to do,"he said,"because you would have to work out what
they would have put in when they did not put this in, and then you have to work out what that
would have done to the average."
In relation to the second phase, Diamond stressed in his letter to the Treasury Committee that,
"the authorities found that Barclays reduced its LIBOR submissions to protect the reputation of
the bank from negative speculation during periods of acute market stress."3" He emphasized that
speculation regarding Barclays' liquidity was"unwarranted,""inaccurate,"and "created a real
and material risk that the bank and its shareholders would suffer damage."He concluded:"Even
taking into account of the abnormal market conditions at the height of the financial crisis, and
that the motivation was to protect the bank, not to influence the ultimate rate, I accept that the
decision to lower submissions was wrong.”
AFFIXING BLAME
There are many different viewpoints as to who—or what—is ultimately responsible for the
LIBOR scandal.
According to an external review commissioned by Barclays, the culture of the investment
banking division placed a strong emphasis on delivering desirable results."Many of our
interviewees told us,"the report said,"that while some members of Barclays Capital's
top team inspired and valued loyalty, the team disliked bad news. This all combined to create an
36-BobDiamond's memo toBarclays'staff" The Guardian, July 2,2012,
http://www.guardian.co.uk/business/2012/jul/02/bob-diamond-memo-to-barclays-staff(September 20,2013).
House ofCommons Treasury Committee, Fixing LIBOR: some preliminaryfindings, Volume 2, Q122,
http://www.publications.parliament.uk/pa/cm201213/cmselect/cmtreasy/481/48lii.pdf (September 19,2013).
House ofCommons Treasury Committee, Fixing LIBOR: some preliminaryfindings, Section 28,
http://wwwpublications.parliament uk/pa/cm201213/cmselect/cmtreasy/481/48104.htmtn35 (September 19,2013).
House ofCommons Treasury Committee,"Fixing Libor: Written Evidence,"(Letter to the Chairman ffom Bob
Diamond, ChiefExecutive, Barclays, June 28,2012)
hitp://www parliament uk/documents/commons-committees/treasury/Fixing%20LIBOR%20evidence%202.ndf
Barclays and the LIBOR: Anatomy of a Scandal ETH-03 p.11
environment in which leaders were rarely effectively tested or challenged, contributing to a sense
of ambiguity about what was considered right and wrong."
Diamond, in his memo to Barclays' staff, said "The events revealed last week arose in large part
because we did not have appropriate controls in place. Frankly, we misjudged the risk associated
with the underlying activity." In his testimony, former Barclays chairman Marcus Agius
emphasized that LIBOR submissions were long viewed as low-risk because outliers were
removed and because the rate was historically quite stable.42
The House of Commons Treasure Committee saw things quite differently:
The attempted manipulation of Barclays'LIBOR submissions with the intention
of personal gain continued for four years. It is shocking that it flourished for so
long. Any system may fail for a short period, but compliance at Barclays was
persistently ineffective. Even when Barclays' compliance had indications that
something was awry, it failed to take the opportunity to strengthen the bank's
controls. Nor was there any pressure from senior executives within Barclays to
ensure that effective LIBOR controls were in place... These are serious failures of
govemance within Barclays, for which the board is responsible.43
In its own dissection of the scandal, the financial community and press have put forth a variety of
explanations. Martin Wheatley, the top financial regulator in Britain, argued that a code of
conduct with clear rules, overseen by a regulator with extensive powers, would be sufficient to
correct the problem. The editors of Bloomberg blamed the culture of finance and suggested the
key to changing this was aggressive prosecution of those who had manipulated rates. Some
bankers suggested the scandal resulted from the actions of a few bad individuals, and that once
these people were removed, the system would again function smoothly. In contrast, financial
journalist lan Fraser argued,"Many banks have sought to blame LIBOR rigging on individual
rogue traders,'many of whom have already been fired or suspended. But there is strong
evidence to suggest that, in both phases of LIBOR rigging, the traders were only obeying orders
from more senior investment banking colleagues." And James Surowiecki, writing in the New
Yorker, blamed prety much everybody:"The most striking thing about this scandal is that it was
predictable—the way LIBOR was designed practically invited corruption—yet no one did
anything to stop it.”
40S;alz Review,"An Independent Review ofBarclays' Business Practices, April 2013,Section 8.39,
https://www.salzreview.co.uk/c/document library/eet file?uuid=557994c9-9c7f-4037-887b-
8b5623bed25e&groupld=4705611 (September 19,2013).
41 "Bob Diamond's Memo to Barclays'Staff," The Guardian, July 2,2012,
http://www.guardian.co.uk/business/2012/jul/02/bob-diamond-memo-to-barclays-staff (September 20,2013).
42 House of Commons Treasury Committee, Fixing LIBOR: some preliminary findings, Volume 2, Q648,
http://www.publications.parliament uk/pa/cm201213/cmselect/cmtreasy/481/48lii.pdf(September 19,2013).
43House of Commons Treasury Committee, Fixing LIBOR: some preliminaryfindings,Section 38,
http:/ /www publications, parliament uk/pa/ cm201213/ cmselect/ cmtreasy/481 /48103 . htm (September 19 ,2013) .
44
Jamie Mann,"Rate Rigging Traders to be 'Scapegoats 'as Arrests Imminent,"The Scotish Times,July 23,2012,
http://www.scottishtimes com/rate rigging traders to be scapegoats as arrests imminent (September 20,2013).
451
James Surowiecki,"Bankers Gone Wild,"The New Yorker, July 30,2012,
http://www.newyorker.com/talk/financial/2012/07/30/120730ta talk surowiecki(September 20,2013).
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Barclays and the LIBOR: Anatomy of a Scandal ETH-03 p.12
In the wake of Barclays' LIBOR settlement, Douglas Keenan, a former trader at Morgan Stanley,
published an op-ed in the Financial Times in which he suggested that misreporting of LIBOR
rates may have been common practice since 1991."I talked with some of my more experienced
colleagues about this,"Keenan wrote."They told me banks misreported the LIBOR rates in a
way that would generally bring them profits. I had been unaware of that, as I was relatively new
to financial trading. My naivety seemed to be humorous to my colleagues." y46
AFTERMATH
Investigations into alleged manipulations of the LIBOR by other banks continued after the
Barclays settlement. In December 2012, UBS agreed to pay a $1.5 billion fine—the FSA
deemed UBS offenses "considerably more serious"47 than Barclays' offenses and two former
UBS traders were formally charged. In February 2013, Royal Bank of Scotland was fined $612
million. As of autumn 2013, more than a dozen other banks remained under investigation with
more charges, and settlements, expected to come.
Regulatory authority over the LIBOR was given to the U.K.'s Financial Conduct Authority,
headed by Martin Wheatley, and the FSA was shut down. Responsibility for setting the LIBOR
was taken from the BBA and awarded to NYSE Euronext.48 While the LIBOR would continue to
be set by a surveyed panel of banks, Wheatley tasked Euronext with finding a way to tie the rates
more closely to actual transactions. One possibility suggested was the creation of two parallel
rates, one from surveys and the other transaction-based.
In February 2013, Antony Jenkins—Diamond's successor as Barclays CEO—told the
Parliamentary Commission on Banking Standards that he was "shredding"Diamond's legacy
and working to change Barclays "aggressive"and"self-serving" culture.50 In spring 2013,
Diamond was profiled in the New York Times Magazine. The article, by Andrew Sorkin, called
Diamond's role in the scandal "minimal, and perhaps wildly overblown."1 In discussing the
LIBOR scandal,Diamond told Sorkin:
Do you want the truth? Up until all of this, I didn't even know the mechanics of
how Libor was set. If you asked me who at Barclays submitted the rate every day,
461Douglas Keenan,"My Thwarted Attempt to Tell ofLIBOR Shenanigans,"The Financial Times, July 26,2012,
http://www,ft.com/int//cms/s/0/dc5f49c2-d67b-11e1-ba60-00144feabdcO,htm(September 20,2013).
Jil Treanor,"Two Former UBS Employees Charged in US Over LIBOR,"The Guardian, December 19,2012,
http://www.theguardian .com/business/2012/dec/19/ubs-1bn-libor-payments-to-brokers(September 20,2013).
48Brooke Masters and Philip Stafford,"Scandal-Plagued Libor Moves to NYSE,"The Financial Times, July 9,
2013.http://www.ft.com/intl/cms/s/0/73332222-e87f-11e2-aead-00144feabdc0.html#axzz2e2YIYyAh (September
20.2013)
49Q&AWhat Next for LIBOR?" The Financial Times, July 9,2013, http://www.ft. com/intl/cms/s/0/b861dc76-
e884-11e2-aead-00144feabdc0.html#axzz2e2YTYyAh (September 20,2013).
Martin Robinson,"Barclays will 'shred' Bob Diamond's legacy by slashing bonuses as it is forced to set aside
another flbn for mis-selling scandals," The Daily Mail. February 5,2013,http://www.dailymail co uk/news/article-
2273668/Barclays-shred-Bob-Diamonds-legacy-slash-bonuses-forced-1bn-mis-selling html (September 20,2013).
51 Andrew Ross Sorkin,"Bob Diamond's Next Life," The NewYork TimesMagacine, May 2,2013,
http://www.nytimes.com/2013/05/05/magazine/robert-diamonds-next-life html?nagewanted=all& r=0(September
20,2013).
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Barclays and the LIBOR: Anatomy of a Scandal ETH-03 p.13
I wouldn't be able to tell you. I bet you if you asked any chief executive of any
bank on the street, they would give you the same answer.32
Study Questions
1.What aspect of the first phase of LIBOR manipulation was most ethically problematic:
● The fact that Barclays intentionally falsified its LIBOR submissions?
· The(mis)use of relationships between Barclays' traders and submitters to gain an unfair
advantage?
· The fact that rate manipulation affected millions of people whose mortgages or
investments were tied to the LIBOR?
· The possibility that rate-rigging could undermine public trust in LIBOR and other
comerstones of the global financial system?
2. At least some Barclays traders had good reason to believe that other banks were manipulating
LIBOR submissions in 2005-2006. How do you think this affected the Barclays traders'
behavior? Does it affect your ethical assessment of their behavior?
3. Who is responsible for compliance in an institution in which executives pressure subordinates
to deliver results but don't monitor their actions? What is the role of corporate culture in
ensuring compliance? How should a company handle internal whistleblowing?
4. Is there any ethical distinction between individual traders' manipulation of the LIBOR and
banks' systematic submission of unrealistically low rates during the credit crisis? Why or why
not?
5.Does the fact that governments may have condoned, or even encouraged, banks to understate
their LIBOR submissions in 2007-2008 affect your ethical assessment of Barclays' behavior
during the credit crisis?
6. Can you think of other examples(in finance or in other industries) that mirror the LIBOR
case? What are the common features of LIBOR manipulation and your example?
52 bid.
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Barclays and theLIBOR:Anatomy ofa Scandal ETH-03 p.14
Exhibit 1:LIBOR Manipulation in a"Plain-Vanilla"Interest Rate Swap
Floating Rate: LIBOR+0.2%
Barclays
Fixed Rate: 5.0%
This is a hypothetical example of a"plain vanilla" interest rate swap for $4 billion in loans. It
explains the mechanics of how a Barclays trader could benefit from LIBOR manipulation.
A Barclays trader and a Counterparty agree to a deal with the following terms. At a specified
date in the future
· Barclays pays Counterparty:$4bn x(LIBOR+0.2%)
Counterparty pays Barclays:$4bn x 5%
The resulting net payment from Barclays to Counterparty is:$4bn x(LIBOR-4.8%).
· Note that depending on how interest rates move, this payment can be either positive or
negative. Also note that in this example Barelays benefits from a low LIBOR.
Now the date for the payments arrives. Suppose the other fifteen banks submit the following
rates for the 3-month U.S. dollar LIBOR: 4.810,4.810,4.810,4.810,4.815,4.815,4.815,4.815,
4.815,4.820,4.820,4.820,4.820,4.820,4.830.
When calculating the 3-month U.S. dollar LIBOR, the four highest and four lowest submissions
are tossed out.
Suppose Barclays believes the accurate rate to submit is 4.820.
· If Barclays submits 4.820, the LIBOR is 4.816875, so Barclays must pay $675,000 to
Counterparty
If Barclays submits 4.815, the LIBOR is 4.81625, so Barclays must pay $ 650,000 to
Counterparty
· If Barclays submits 4.810,the LIBOR is 4.815625,so Barclays must pay$625,000 to
Counterparty.
A submission above 4.820 or below 4.810 will have no additional effect on the LIBOR or
Barclays's payments.
With collusion, the effect can be larger. For example, suppose Barclays submits 4.810.Suppose
it also convinces two banks to submit 4.810 rather than 4.815 and convinces a third bank to
submit 4.810 rather than 4.820. Then the LIBOR is 4.813125 and Barclays only needs to pay
$525.000 to Counterparty
This document is auhorized tor use only in James Cummings's FINC6014,Sem 22023 at University of Sydney tom ju 2023 to dan 2024.
Counterparty
Barclays and the LIBOR: Anatomy of a Scandal ETH-03 p.15
Exhibit 2: Barelays' Head Over the Parapet³
The blue line is Barclays' 3-month U.S. dollar LIBOR submission. The red line is the fix,or
reported LIBOR, based on all banks' submissions. Light grey lines are other individual banks'
submissions.
535Simon Rogers,"Libor Rate Fixing; See Each Bank's Submissions,"The Guardian,July 3,2012,
http://www.theguardian.com/news/datablog/interactive/2012/iul/03/libor-rate-fixing-bank-submissions,
1,2013). Reproduced with permission.
This document is authorized for use only in James Cummings's FINC6014, Sem 22023 at University of Sydney from Jul 2023 to Jan 2024.
(November
