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BANKS/ After Lehman and JP Morgan, now Barclays in turmoil

July Wed 04, 2012

(Infophoto)  (Infophoto)

After a week of pressure, the chief executive of Barclays, Bob Diamond, resigned yesterday after the bank was forced to pay a fine of 290 million pounds for having manipulated the Libor interest rates (London Interbank Offered Rate). The fact that the Lex column of the June 28th Financial Times dedicated to the now former head of the bank, advised him strongly, and without beating around the bush, to resign, provides an idea of the atmosphere that surrounded Diamond.

The affair that led to yesterday’s resignation and that is still ongoing, with results that are unpredictable and certainly not concluded, concerns the manipulation of the Libor index, which among other things is the reference rate for hundreds of billions of dollars in assets including loans, mortgages, swaps, derivatives, etc. In particular, Barclays manipulated their own daily indicators that end up on the Libor of the “British Bankers' Association”, during the crisis period (that of Lehman) to prevent an unacceptably high rate, which would have signaled a critical situation to traders, with the inevitable consequences on the perception that the market would have had on the safety and reliability of the bank. The more a bank is considered solid, the lower the rate at which it can borrow money and vice versa, according to the same dynamic according to which Germany now pays a rate that is less than half of the Italian one.

The transcripts of some emails exchanged between members of the market and the bank also indicate practices motivated by less “systematic” and more, let’s say, “opportunistic” reasons. Among these is one in which a trader outside Barclays asked an employee of the British bank to report a three-month Libor lower than the previous one and, that granted, promised to repay him with a drink of Bollinger after work (champagne just a hair more expensive than a cold beer).

If the affair were limited to the bad behavior of a few unfaithful or particularly greedy traders, the stream of articles and comments would probably have stopped long ago. The problem is that there is a possible involvement not only of other major Anglo-Saxon financial institutions (American institutions included), which may have been behaving the same way as Barclays, in a sort of open secret, but also of the number two of the British central bank, Paul Tucker. On the sidelines of this affair that, we reiterate, is far from over, two simple considerations can be extracted.



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