Just when we think we have heard the last of massive bungling by the banks, it gets worse. The FSA’s Final Notice to Barclays of 27th June is 45 pages and an interesting read. Apparently the manipulation of Libor and Euribor interest rates continued from 2005 to 2011 but the implication is that it has been standard practice since derivatives were invented.
The FSA fine of £59.5M was discounted at 30% (it would have been £85M) to recognise Barclays’ “early” stage settlement. The US fines were £128.5M (Commodity Futures Trading Commission) and £103M (US Justice Department's Criminal Division) "in a related manner". The FSA has no methodology for calculating the fine, and the figures were plucked out of the air (BBC) - it is hard to see how the US fines can be “related”.
Or was the lead in this taken by the Americans with the FSA playing catch up and calculating the fine from US data?
One also wonders what “early” means. Barclays seem to have thrown in the towel before the other banks, but the malpractices have been continuing for at least seven years. The Final Notice does not say when they ceased, if they have, nor when their investigations began, nor what prompted them. The Report does say that the three groups of people who should have brought the malpractices to an end, top management aside, namely the FSA, the Bank of England and Barclays’ own compliance team, were each warned by traders concerned about legality some years ago, but the communications were too vague and muddled to have any effect.
The news breaking on Barclays before the other banks may not be down to Barclays’ speed to settlement so much as being the main culprit. The other fines will presumably establish the culpability ranking.
So we need to hear from Barclays and the FSA exactly who blew the whistle when. The Times (30th June) reports possible whistleblowers as far afield as Singapore and Canada which indicates that the corruption, or knowledge of it, was global.
The vacuity of the calculation of the fine is not acceptable. Precedent is to calculate how much of the firm’s profits is due to malpractice and then negotiate a reasonable division of that. The shareholders need to know these figures not least to calculate the management bonuses based on false profits. Future management may well seek to recover those bonuses either voluntarily or by law suit. Why should shareholders pay twice over (government fines and bonuses to executives) for the executives’ misconduct?
In equity, however, Barclays are entitled to a discount due to the FSA being asleep at the wheel. It is good that the FSA has finally woken up after 10 years of inaction, but the specialist City press has carried concerns about the Libor setting process for years. All through the financial crisis of 2007/8 the press carried rumours about misleading interest rate reporting. How did the FSA miss all that and fail to investigate in a timely fashion?
According to Ian King (The Times 30th June). Mervyn King was, in 2008, sufficiently concerned by the Libor methodology to press for changes, but gave up because he did not have regulatory responsibility. Why did he not phone the FSA?
Barclays’ top management did express concerns about the poor PR they were getting for having to pay higher rates: the rumours about rate fixing implied Barclays financial position was not as strong as they were trying to make out. The Final Notice does not say that the malpractices followed specific instructions from the top. It does, however, claim that less senior managers interpreted the concerns expressed by top management as rate fixing instructions which they passed on to their market traders and submitters (to Libor and Euribor).
Bob Diamond tries to sweep this away by saying the inappropriate conduct was confined to “a small number of people” (The Times, p.1 29th June) but the FSA says that at least 14 traders were involved (para 57, p.11). If you add Submitters and managers, the number may well be over 20. If you add the global dimension mentioned above, the numbers privy to these schemes must be in three figures.
It is hard to believe that hands-on top management of Barclays Capital did not know what was going on.
The Report notes that the British Bankers Association conducted an investigation in the summer of 2008 but, incredibly, the Barclays’ Compliance Team was not involved. The result was a whitewash: the BBA restated the rules and the traders and submitters carried on regardless.
The FSA has as many questions to answer as Barclays. Press reports over the last week or so have portrayed them as the Sherriff riding in to clean up the City, but only part of the story has emerged. It is at least possible that the same inattention and inactivity which allowed the 2007/8 financial crisis to develop, have characterised this new disaster. When a householder leaves his keys in the front door, one cannot wholly blame the burglar.