Worldwide: LIBOR Manipulation Coverage

Last Updated: 1 August 2012
Article by James Cooper

Criminal Investigations

Traders involved in LIBOR manipulation may be charged by prosecutors in the United States before the US Labour Day holiday on 3 September 2012, following investigations into rate-fixing by the US Justice Department.

As investigations intensify globally, US and UK lawmakers will look to Treasury Committee hearings over the past few weeks to expand their investigations into other banks tied into the scandal.

UK Regulatory Investigations

Tracey McDermott of the FSA stated that the regulator is currently still investigating 7 UK banks, concurrent with the criminal probe opened by the Serious Fraud Office on 6 July. The FSA has come under criticism in the aftermath of the Barclays fine for not properly regulating this area. The FSA confirmed that it is looking to levy more civil fines, though named no specific banks. It has been speculated in the media that HSBC's regulatory fine could be up to $1 billion.

It has been reported that an email sent from Barclays to staff on 13 July states that the fine for rate-fixing levied on other firms will likely exceed the £290 million given to Barclays. Martin Agius, Barclays Chairman, said that once other banks come to receive their fines, Barclays situation will "eventually be put into perspective."

A group of banks being investigated for rate-fixing are looking to pursue a group settlement option with regulators, as opposed to separate fines. Separate fines would likely be higher and would attract individual media attention as Barclays has done since its fine last month. It is unclear which banks are involved in the potential settlement talks, or whether regulators will agree.

UK regulators are the subject of scrutiny in the aftermath of Barclays' fine. As long ago as 2008, the New York Federal Reserve President Timothy Geithner warned the Bank of England that letting bankers set the benchmark interest rate for global finance was open to abuse. US Federal Reserve Chairman Ben S. Bernanke said a number of market rates could replace LIBOR as a benchmark for lending rates, as LIBOR cannot be trusted, in part owing to the failure of UK regulators to act when they flagged up concerns about the vulnerability of LIBOR to the Bank of England.

Further, the FSA opened their investigation in 2010, despite press reports and submissions from bank employees that the LIBOR rates were being manipulated as early as 2007. Kent Matthews, a finance professor at Cardiff University Business School, feels it was the Bank of England who were "sleeping on the job" as they were "capable of taking on regulatory powers" but took no action.

International Regulatory Investigations

Christian Bittar at Deutsche Bank, Didier Sander at HSBC, and Michael Zrihen at Credit Agricole are traders under investigation for rate-manipulation, as they are linked to Philippe Moryoussef, an ex-trader at Barclays who is also suspected of rate-manipulation. Since investigations started, at least 34 traders have been fired or suspended by their employer banks, or investigated by US/UK authorities.

Deutsche Bank reached an agreement to cooperate with the European Commission in the investigation into LIBOR rate-fixing in an effort to lower any eventual penalties.

In September 2012, the Financial Stability Board will consider alternatives to LIBOR. Joining the discussion will be Mervyn King, Governor of the Bank of England, central bankers from India and Brazil, and other governors from the Bank for International Settlements.

Regulators across the globe are re-examining how accusations of LIBOR rate-manipulation has affected them. STIBOR, Sweden's main interbank rate, and TIBOR (Japan) are among rates facing the most recent scrutiny, as their systems are structured similarly or identical to the LIBOR rate-setting system. Sweden's central bank, the Japanese Bankers Association, the Monetary Authority of Singapore, the Investment Industry Regulatory Organization of Canada, and South Korea's Fair Trade Commission have all announced probes into how their domestic rates are set.

The Japanese Bankers Association announced that their review would consist of as many as 16 banks, including the lending units of Mitsubishi, JP Morgan Chase, and Deutsche Bank. The democratic party of Japan called the banking lobby to explain how TIBOR is set on 19 July.

The Monetary Authority of Singapore announced on 18 July that it would be looking into how banks set "key market interest rate benchmarks" amid several reviews by regulators internationally. South Korea's Fair Trade Commission inspected 10 brokerages and 9 banks on 17 July, to ensure there was no collusion on certificate deposit rates.

European Parliament may hold hearings into LIBOR rate-fixing, which would mean that bankers and regulators would be called to appear before an EU Parliamentary hearing into the scandal. This decision comes as the assembly is preparing to implement legal measures to punish illicit rate-fixing.

Congressional investigations into rate-fixing in London banks are expanding into US domestic banks with a focus on the dialogue between the banks and the Federal Reserve.

Commercial Investigations

Deutsche Bank ordered an internal investigation into potential LIBOR and EURIBOR manipulation at the bank in 2010.

Italian bank UniCredit opened an investigation to evaluate the potential damage caused by the rate manipulation in London.

A group representing UK mortgage providers said this week that the scandal surrounding LIBOR rates won't hurt home owners, as it is very unlikely that LIBOR-fixing has had any material impact on consumers at all, and if anything, a downward impact on LIBOR would be advantageous overall to the wider influence on rates and pricing of mortgages. In addition, only a small percentage of UK home loans tend to track LIBOR.

Financial Services Reform

European Parliament and the European Commission are seeking to make abuse of interbank rates punishable by criminal sanctions, through amendments to the market abuse regime. The EC will publish plans for how EU-market abuse rules should be amended next week, and is seeking approval of the plan by the end of the year.

Litigation

Nomura has estimated that the final cost of the LIBOR scandal to banks will be anywhere from "a few billion to hundreds of billions." Analysts predict that LIBOR manipulation could in fact cost near the higher end of Nomura's estimate, from those seeking compensation.

Bloomberg has reported that Goldman Sachs and Morgan Stanley are two firms considering lawsuits against banks involved in rate-fixing. An analyst from Sanford S. Bernstein & Co. has said that even if they forego claims on their own behalf, they oversee money-market funds that may be required to pursue restitution for injured clients, in what he called "Wall Street suing Wall Street."

Barclays coverage

The Treasury Committee Hearings

On 16 July 2012, Barclays former Chief Operating Officer, Jerry del Missier, appeared before the Treasury Committee. He stated that Bob Diamond had issued his instructions to "lowball LIBOR" following a phone call with the Bank of England in which they said that Barclays' rates were high and Barclays should not make themselves an outlier. Mr del Missier said that he believed the instructions came to Barclays from the Bank of England, and that the action taken by Barclays at the time was "appropriate" and insignificant given the overarching financial crisis at the time.

Mr del Missier contradicted Mr Diamond's testimony before the Treasury Committee earlier this month by stating that Mr Diamond did tell him to lower Barclays' LIBOR submissions.

On 17 July, Bank of England Governor Mervyn King appeared before the Treasury Committee and told MPs that although he knew of the authorities' "deep concerns about Barclays culture," he only learned of the rate-fixing once Barclays had been fined on 27 June. Mr King further stated that "the culture of Barclays made regulating the bank extraordinarily difficult." Mr Tucker denied that the Bank of England passed on instructions to Mr Diamond to artificially lower Barclays' LIBOR submissions.

On 17 July, Bank of England Deputy Governor Paul Tucker also appeared before the Treasury Committee. He said that he urged Barclays, HSBC and RBS to press the BBA to carry out an overarching review of LIBOR in 2008. Mr Tucker further faced embarrassment after Labour MP John Mann released details of congratulatory e-mails exchanged between him and Mr Diamond following Mr Tucker's appointment as Deputy Governor.

Further Regulatory Investigation

Philippe Moryoussef, a senior trader who worked at Barclays from 2005 - 2007, is being investigated by US regulators under suspicion of involvement in the rate-fixing scandal. There is evidence that Mr Moryoussef regularly contacted traders at four other banks, including HSBC, SocGen, Deutsche Bank and Credit Agricole, about submitting false rates to the daily setting of EURIBOR.

US Involvement

Barclays told US regulators as early as April 2008 that it was artificially lowering LIBOR rate submissions to avoid the perception that the bank was struggling to fund itself, as was revealed on 13 July, when the Federal Reserve Bank of New York released a manuscript of a phone call from April 2008 in which a Barclays employee told an analyst: "we know that we're not posting an honest LIBOR." In response to allegations that the Federal Reserve was aware of LIBOR-fixing practices, the Fed stated that it "lacked jurisdiction" to police banks engaged in LIBOR-manipulation.

Business News

Barclays will leave a 12-bank panel in the United Arab Emirates, whose quotes determine the interbank lending rate, within 3 months.

Sir Michael Rake, current Chairman of EasyJet and the BT Group, has announced that he is not interested in being considered for the role of Barclays Chairman. Shareholders have indicated that they are looking for an external person to fulfil the role to dispense with the LIBOR stigma.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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