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British bank Barclays will pay $453 million US to U.S. and British authorities to settle allegations that it manipulated key interbank lending rates known as Libor, ramping up pressure on other banks to cooperate in a probe that could cost the banking industry billions of dollars.
Barclays admitted to trying to make Libor look artificially low, to avoid signalling the bank's distress to markets during the financial crisis. The bank also manipulated borrowing rates to benefit its trading positions.
Libor underpins trillions of dollars in derivative contracts and is a crucial peg for corporate borrowing rates worldwide, linked to everything from U.S. consumer credit cards to loans funding Turkish phone networks. The manipulation, from 2005 through 2009, meant that millions of borrowers globally paid too little or too much interest on their debt.
The U.S. Commodity Futures Trading Commission, the U.S. Department of Justice and the UK's Financial Services Authority settled with Barclays on a civil basis, while Canadian authorities said they still had an open investigation.
The Justice Department also said it still had a criminal investigation in progress. The Justice Department found that bankers across the industry worked together to manipulate Libor. It also made clear that in some cases the pressure to manipulate rates came from Barclays management.
Market participants said the settlement in many ways confirmed what traders already knew.
"It is an admission that they were manipulating the rates to get better conditions, " said ING strategist Alessandro Giansanti. "There isn't really a lot of trust in the way Libor is calculated as... there were some banks who used to manipulate the rates just to get better conditions in the money market."
The basis of Libor is a daily poll that asks banks including Barclays to enumerate the rates they think they will be able to borrow from other big ba nks. Libor is set daily for 10 major currencies and for 15 borrowing periods, ranging from overnight loans to 12 months.
Thomson Reuters Corp is the British Bankers' Association's official agent for the daily calculation and publishing of the Libor rates. A spokeswoman for the company declined to comment.
Barclays, in a statement, said the settlement related to past actions that fell "well short of the standards" the bank sought to uphold for its business.
"I am sorry that some people acted in a manner not consistent with our culture and values," Barclays chief executive Bob Diamond said, adding that he and three other top executives had agreed with the company's board that they would not receive bonuses this year.
Barclays regularly reported borrowing rates lower than the rates it was actually paying during the financial crisis in order to mask its distress, according to a statement from the U.S. Commodity Futures Trading Commission on Wednesday.
Damning emails that regulators released on Wednesday make clear that traders and the "submitters" tasked with reporting daily rates worked together for years to make the rates submitted suit the traders' and the bank's purposes.
In some cases, submitters set themselves reminders on their calendars to submit low rates on certain dates, according to the emails. In others, traders expressed overwhelming gratitude for low submissions that protected them from losses.
In one communication released by the CFTC, a Barclays employee concedes that borrowing costs are actually higher than what the Libor rates show. The "true cost of money is anything from 5-15 basis points higher," the employee said. A percentage point is equal to 100 basis points.
The CFTC ordered the bank to pay a $200 million penalty, saying it was the largest civil monetary penalty it has ever imposed.
Barclays also settled with the U.S. Department of Justice and the UK's Financial Services Authority and will pay fines of $160 million and $92.8 million, respectively. Th e FSA fine was also a record.
The Department of Justice said Barclays was the first bank being probed "to provide extensive and meaningful cooperation to the government," adding that the bank's assistance had aided its criminal investigation.
Though the Justice Department did not use words like "conspiracy" or "fraud" in its statement of facts, one attorney not related to the case said that was likely a courtesy to Barclays as much as anything else.
"The DOJ did not want to back Barclays into a corner (by) using some of the more terrifying words from the criminal lexicon. I think it was very much a way to give Barclays a face-saving opportunity to resolve the situation," said Anthony Sabino, a professor of law at St. John's University.
Had it gone to court "I think you would have seen the harder terms out of the statute utilized in a criminal complaint."
As well as the FSA and CFTC, other authorities probing Libor manipulation include the European Commission and Japan's Financial Services Authority, as well as the Canadian Competition Bureau.
Other banks involved in the probe include Citigroup, HSBC, Royal Bank of Scotland and UBS.
Several banks have suspended traders over the investigations. No criminal charges have been filed.
As the credit crisis took hold in 2008, allegations started mounting that Libor no longer reflected banks' real borrowing costs, and authorities began examining whether traders tried to influence whether the rate went up or down to profit on bets on its future direction.
The CFTC's findings, including the internal emails, will likely play a significant role in litigation being brought against global banks by trading firms, pension funds, and others who allege that the banks manipulated Libor to profit.
The first major lawsuit against the banks was filed in April 2011 by Vienna hedge fund FTC Capital GmbH. The fund claimed that the improper Libor postings impacted Eurodollar futures. Those futures enable trading firms to wager on the direction of interest rates and are priced based on Libor.
Eurodollar interest-rate swaps trading features prominently in the CFTC order. The agency alleged that Barclays traders sought to manipulate Libor to benefit trading European derivatives trading positions.