Here is a good explanation of what Barclay’s did:<\/p>\n
Bob Diamond, former Barclays chief, says regulators complicit in rates scandal<\/p>\n
LONDON \u2014 Fallen banking titan Bob Diamond on Wednesday described regulators on both sides of the Atlantic as partly complicit in a scandal involving the manipulation of a key interbank lending rate, telling a British parliamentary committee that government watchdogs had failed to act after his bank, Barclays, informed them of industry-wide irregularities during the U.S. financial crisis.<\/p>\n
The allegations highlight the relationship between financial institutions and regulators at a time when risk-taking and misdoings at big banks again are the focus of debate in Washington, on Wall Street and in London. Diamond stepped down Tuesday as chief executive of Barclays on the heels of a U.S.-British investigation that resulted in a $450 million fine for the bank for manipulating key lending rates between 2005 and 2009. The resignation ended the tenure of a legendary figure who brought a high-flying American-style culture to the bowler-hatted bankers of London\u2019s financial district.<\/p>\n
Barclays is one of a number of global banks being investigated for alleged improprieties that tainted the credibility of the London interbank offered rate, or Libor, the benchmark figure that largely determines the adjustable lending rates for U.S. credit cards, student loans and some mortgages. The emerging scandal has touched off a firestorm engulfing the London financial world, with Prime Minister David Cameron this week announcing a broader inquiry into banking standards that is set to haul some of the globe\u2019s most powerful financiers before a parliamentary committee.<\/p>\n
At the hearing Wednesday, furious British politicians seemed to put Diamond on trial as if he were the Gordon Gekko character from the \u201cWall Street\u201d films, blaming him for importing a culture of risk and big bonuses to London. The 60-year-old American sought to defend his response to the Libor scandal, insisting he learned only last month about the extent of wrongdoing among an \u201cabhorrent\u201d but \u201csmall\u201d group of 14 rogue traders at Barclays who had been manipulating rates for personal gain.<\/p>\n
Diamond also painted a picture of the bank\u2019s accusers \u2014 government regulators \u2014 as at least partially to blame. Documents released by Barclays on Tuesday night said the bank had \u201craised concerns\u201d with British regulators, the Bank of England and the U.S. Federal Reserve that other financial institutions were not being honest about interbank lending rates during the financial crisis that peaked in September 2008.<\/p>\n
Other banks, Diamond said, were routinely underreporting the rates at which they were borrowing, afraid that revealing how high their costs had soared would spark an investor panic or government nationalizations. He seemed to suggest that regulators were content to see misreporting of interbank lending during times of crisis, when strict accounting of high rates could tighten lending even more, and that they acted to curb such activity only during less sensitive periods.<\/p>\n
Asked how regulators responded to Barclays\u2019s reports of widespread misreporting, Diamond said, \u201cVarious levels of acknowledgment but no action.\u201d<\/p>\n
\u201cThere was an issue out there,\u201d he added, \u201cand it should have been dealt with more broadly.\u201d<\/p>\n
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\nExplainer: Why the LIBOR scandal is a bigger deal than JPMorgan
\nBy Dylan Matthews , Updated: July 5, 2012<\/p>\n
Last week, Barclay\u2019s admitted to rigging the London InterBank Offered Rate (LIBOR) and agreed to pay U.S. and British regulators $450 million dollars in penalties to settle the case. Then the heads began to roll: On Tuesday, its CEO, Bob Diamond, and COO Jerry del Missier resigned, and yesterday Diamond told a British parliamentary inquiry that regulators in Washington and London alike were complicit in his manipulations.<\/p>\n
This is a big deal. Remember that JP Morgan scandal a few months back? That was mostly JP Morgan hurting itself. The LIBOR scandal was Barclay\u2019s making money by hurting you.<\/p>\n
In the simplest terms, LIBOR is the average interest rate which banks in London are charging each other for borrowing. It\u2019s calculated by Thomson Reuters \u2014 the parent company of the Reuters news agency \u2014 for the British Banking Association (BBA), a trade association of banks and financial services companies. The actual process of determining the rates is dead simple, and in fact conducted by only two people. Donald MacKenzie, a sociology professor at the University of Edinburgh, described the process in the London Review of Books:<\/p>\n
The calculation of Libor is coordinated by just two people, who work in an unremarkable open-plan office in London\u2019s Docklands. I watched the process, which seemed utterly routine, a couple of years ago. Just after 11 a.m. on every weekday that\u2019s not a bank holiday, traders at leading banks send in their estimates of the interest rates at which their banks could borrow money. They do this electronically, but sometimes the co-ordinators make a phone call to a bank that hasn\u2019t sent in its estimates, and if the latter seem implausible \u2013 typos, for example, are fairly common \u2013 they\u2019re checked, also with a quick call: \u2018Hi there, is the Kiwi chap [provider of the estimates for borrowing New Zealand dollars] about? \u2026 Bit of a spread on the two month. Everyone else is coming in a good bit under that.\u2019<\/p>\n
A simple computer program discards the lowest quarter and highest quarter of the estimates, and calculates the average of the remainder. The result is that day\u2019s Libor. The calculation is repeated for each of ten currencies and 15 loan durations (from overnight to 12 months), so 150 Libors are published daily: overnight sterling Libor, one-week euro Libor, one-month yen Libor, three-month US dollar Libor and so on.<\/p>\n
So why does everyone care about a handful of numbers that a couple guys in an office crunch every day before lunch? The simple answer is that $360 trillion in assets worldwide are indexed to LIBOR, and much of those assets are consumer debt instruments like mortgages, car loans and credit card loans.<\/p>\n
In the United States, the two biggest indices for adjustable rate mortgages and other consumer debt are the prime rate (that is, the rate banks charge favored or \u201cprime\u201d consumers) and LIBOR, with the latter particularly popular for subprime loans. A study from Mark Schweitzer and Guhan Venkatu at the Cleveland Fed looked at survey data in Ohio and found that by 2008, almost 60 percent of prime adjustable rate mortgages, and nearly 100 percent of subprime ones, were indexed to LIBOR:<\/p>\n
That means that when LIBOR rises, so do the prices ordinary consumers pay to, say, get a mortgage. Which means a bank that mucks with the LIBOR rate isn\u2019t just playing around with esoteric derivatives that will only affect other traders: They\u2019re playing with the real economy that most of us participate in every day.<\/p>\n
So how did the manipulations by Barclay\u2019s affect this rate? First, from 2005 and 2007, the bank allegedly varied the rates it reported to the BBA and Thomson Reuters so as to improve its margins on internal trades. For example, it could have placed bets that the LIBOR rate would increase, and then reported artificially high rates which in turn artificially increased the LIBOR averages, so that the bets were likelier to pay off. This not only screwed the investors on the other side of the trade, but bumped up mortgage rates \u2013 however infinitesimally \u2013 for consumers even when the risk of the loans hadn\u2019t changed at all.<\/p>\n
Second, in late 2008 Barclay\u2019s \u2013 and, Diamond alleges, other banks \u2013 apparently low-balled the rates they reported for LIBOR averaging so as to make the banks\u2019 finances look more stable than they were. The idea was to put out a false image of stability to prevent market panic and stave off calls for additional regulation or even nationalization, a solution that looked increasingly likely during the height of the financial crisis. The direct effect for consumers here was to make loans cheaper, but the indirect effect, or the intended one at least, was to lessen chances of government action against the banks. So the banks manipulating LIBOR weren\u2019t just messing with peoples\u2019 finances \u2013 they were trying to mess with the peoples\u2019 laws.<\/p>\n
The LIBOR scandal, then, is something more insidious than the multibillion-dollar failed trade that got JPMorgan into so much hot water. Unlike the assets JPMorgan was trading on, the LIBOR rate has real consequences for average consumers, and its manipulation could hurt your typical mortgage-holder, however minimally.<\/p>\n
Further, at least some LIBOR manipulation was an attempt to manipulate government policy by changing the very data that regulators use to make decisions. If the LIBOR games prevented governments from pursuing policies that could have made the financial system more stable, the main victims, again, are ordinary con<\/p>\n","protected":false},"excerpt":{"rendered":"
Here is a good explanation of what Barclay’s did: Bob Diamond, former Barclays chief, says regulators complicit in rates scandal LONDON \u2014 Fallen banking titan Bob Diamond on Wednesday described regulators on both sides of the Atlantic as partly complicit … Continue reading