TOPICS > Economy

Britain’s Barclays Investigated for Rigging Libor Rates

July 6, 2012 at 12:00 AM EST
In a scandal that triggered a CEO resignation, an investigation and basic questions about the integrity of the financial system, British bank Barclays paid $450 million in fines last week to settle accusations that it helped rig the Libor rate. Margaret Warner discusses the fallout with David Enrich of the Wall Street Journal.
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JUDY WOODRUFF: Banks and the way some have operated were back at the center of attention again this week. The focus this time is on the British bank Barclays and how it and others altered lending rates for profits.

Margaret Warner has the story.

MARGARET WARNER: The scandal ventures on a key interest rate called LIBOR and on attempts to manipulate it.

Last week, Barclays paid $450 million in fines to settle accusations by British and U.S. regulators that it helped rig the LIBOR rate in a way that benefited its business. LIBOR is the acronym for the London Interbank Offered Rate. It is determined by what banks report they are paying to borrow from other banks.

The rate has huge significance. It’s used to set interest rates in more than $350 trillion of contracts globally, ranging from home mortgages to complicated financial swaps. The settlement set off a firestorm, leading to the resignation this week of Barclays CEO Robert Diamond and hearings in Parliament. Regulators are looking at other global banks as well.

For more, we turn to David Enrich, European banking editor for The Wall Street Journal.

David, thanks for joining us.

Explain LIBOR a little more for us, first of all,. How important is it and how is it set? How are banks even in a position to manipulate it?

DAVID ENRICH, European banking editor, The Wall Street Journal: Well, first of all, it is immensely important.

As you mentioned, it’s the benchmark for interest rates on trillions and trillions of dollars of loans around the world. It is set in a fairly controversial manner, actually. It’s arranged by a trade group of banks in London. Every day around lunchtime in London, about 16 banks submit to the British Bankers’ Association data that is an estimate of how much it would cost those banks to borrow from each other.

So there’s not very much oversight over how the banks submit that data. And what we’re seeing now — and there have been suspicions about this for several years now, but what we are now seeing very concrete evidence of is that the banks deliberately and knowingly submitted false data to benefit themselves.

MARGARET WARNER: So explain how the scheme that Barclays has admitted to, how it worked. This is between 2005 and 2009, right?

DAVID ENRICH: Yes.

And it’s — just at the outset, it’s very important to mention that this is Barclays that settled these charges this week, but there is every reason to believe that this is a widespread industry practice. And there is clear evidence of collusion. This is — Barclays is getting a lot of the blame for this right now, but everyone was doing this.

Basically, there were two things that were going on. First of all, banks in general were submitting data that reflect — that suggested that they had lowered borrowing costs than they really did. And that is important because the degree that banks’ borrowing costs go up, that is a warning sign about the bank’s health.

The slightly more nefarious thing that was happening is that traders at banks like Barclays were essentially conspiring to fudge this data to boost their own trading profits. So one part of Barclays would say to another part of Barclays, can you please submit data that makes us look — that either is higher or lower than it really is in order to boost our profits?

Or they were getting requests from traders at hedge funds and other banks even, traders e-mailing each other, saying, hey, it would be really helpful if you could goose your numbers one way or another, and the bankers were all too happy to accede to those requests.

MARGARET WARNER: Because in part, the trading operations are betting on the LIBOR rate in one way or another, right?

DAVID ENRICH: Yes, that’s exactly right.

They were betting on the LIBOR rate and they were betting on the individual submissions that different banks would make. So, for instance in Barclays case, Barclays is going to submit a number every day. And traders had bets that were kind of keyed to that number. And so they had a direct financial incentive in that number either being higher or lower on any given day.

MARGARET WARNER: So give us a flavor of some of these incriminating e-mails that were released, along with the settlement.

DAVID ENRICH: Yes, there is really colorful stuff there. And traders e-mailing each other saying, hey, I really need you to — I really need my rates to come in at a certain rate. If it doesn’t happen, I’m going get killed. The Barclays traders respond with things like, for you, big boy, anything.

And the trader on the other side of it responds, saying, I owe you big-time. Come over to my house some time and we will crack open an expensive bottle of champagne. So, it’s unequivocal, flagrant stuff. This is not — there’s not a whole lot of nuance about it. It’s really and clearly blatant — blatant disregard for the law and also a clear understanding of what they were doing and that they were manipulating this very important benchmark.

MARGARET WARNER: Now, what is the effect on others by this? In other words, who was hurt by this?

DAVID ENRICH: Well, that is kind of at the crux of this right now.

As you said at the outset, the LIBOR rate is the benchmark for trillions of dollars of loans to anyone from individual homeowners to big corporations. And there’s not evidence at the moment that those people were hurt. And if anything, actually, the way the banks were manipulating this, it had the effect of at least marginally reducing the interest rates that these people were paying.

But as with anything in trading, for any — any time there is a winner in a trade, there’s also a loser. It is basically a zero sum game. And so to the degree that the traders at Barclays and the hedge funds and other banks that Barclays was colluding with to artificially set this rate, there inevitably were traders on the other sides of those transactions that were getting hurt.

Now, it is — the argument that the banks are going to make is, well, this really was basically a victimless crime because, you know, the individuals and businesses that have loans pegged to LIBOR were actually seeing their interest rates go down.

But probably the biggest victim of this is actually the financial system as a whole and the integrity of the financial system. It’s just the latest example in the past several years of banks clearly acting in nobody’s interests other than their own to basically deceive people and lie.

And it’s really — it’s just incredibly damaging to the faith that people have, whether it’s regulators or other banks or the press or just the public, the faith that they have in the sanctity and the integrity of the financial system.

MARGARET WARNER: Just briefly before we go, one — are some of the other big banks in the sights now of the regulators? And it’s unfair to ask you these two together, but where were the regulators all this time while this was going on?

DAVID ENRICH: That’s a really good question. It’s a question we asked in The Wall Street Journal this morning.

There’s — the regulators had ample evidence that this was going on. The Wall Street Journal wrote about this back more than four years ago. It fell largely on deaf ears. And there is clear evidence — in these settlement documents that came out last week, there is evidence of a number of banks actually trying to alert the regulators to these widespread problems and the suspicions that were out there.

And there is no evidence — with some exceptions, there is very little evidence that the regulators did anything to stop this until very recently.

MARGARET WARNER: And so — but other banks are now in their sights?

DAVID ENRICH: Oh, absolutely.

Yes, there are at least a dozen other banks, including some big U.S. banks, that are under serious scrutiny and including banks like Citigroup, JPMorgan, and Bank of America in the U.S., banks all over the world. But I think it is highly likely that we’re going to see a lot more damning e-mails and just embarrassing stuff coming out in the coming months.

MARGARET WARNER: So, David Enrich of The Wall Street Journal, thank you so much.

DAVID ENRICH: My pleasure.