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BlogGames at work in the LIBOR scandal

Games at work in the LIBOR scandal

barclays3_2277632b"Such behaviour would only be possible if the management of the bank turned a blind eye to the culture of the trading floor. The standards and culture of Barclays, and banking more widely, are in a poor state.”

- Treasury Select Committee's 300-page report on the Barclays Libor scandal, 20 August 2012

The London Interbank Offered Rate (LIBOR) forms the basis for 550 trillion USD (yes trillions) of mortgages, credit cards, and other financial transactions. Over the summer it became clear that Barclays was systematically “rigging” this rate and paid a fine of 453 million USD.


The Chairman, CEO, and COO have had to resign

It is yet another example of games at work in the financial services industry. In this article I want to briefly look at the games being played in this manipulation. However I would like to also look at the public relations games that have been played since the fine. But before that we need to understand a bit more the process by which the rates are set.

Setting LIBOR rates

LIBOR is supposed to represent the average of interest rates that big banks charge each other to borrow money for periods anywhere from one day to one year. The Libor rates are published everyday by Thomson Reuters in association with the British Bankers Association – a trade organisation. Between 1100 and 1110 hrs London time approximately 15 large “Contributor” banks send their interbank borrowing rates directly and confidentially to the British Bankers Association and Thomson Reuters. The people who send this information are known as “submitters”. Based on this submission the rates are set (using a “trimmed mean” approach).

Games of submission

A lot is at stake for a banks traders when the Libor numbers are submitted. On an $80 billion portfolio of swaps, a 1-basis-point move on one-month, U.S. dollar Libor could benefit a trader by about $667,000, according to data compiled by Bloomberg.

Once again there was supposed to be a “Chinese Wall” between the traders and the submitters. This obviously did not function and so the traders within Barclays influenced the “submitters” – and also influenced traders at other banks to influence their respective submitters. Here are just a few examples to give a flavour of what was going on.

Traders request to a submitter on May 31, 2006:

"We have another big fixing tom[orrow] and with the market move I was hoping we could set the 1M and 3M Libors as high as possible"

Response March 16, 2006 to a swap trader’s request for a high one-month and low three-month US Dollar Libor:

“For you ... anything. I am going to go 78 and 92.5. It is difficult to go lower than that in threes. looking at where cash is trading. In fact, if you did not want a low one I would have gone 93 at least”

Trader e-mail to trader at Barclays who enabled a reduction in Libor submission:

"Dude. I owe you big time! Come over one day after work and I'm opening a bottle of Bollinger."

As the Treasury report wrote again we see the game of Turn a Blind Eye. It is obviously an unrealistic way to run an organization to pretend that in the presence of large material incentives, and the absence of proper control, that games will not be prevalent.

Spin games

Since the conviction there have been a whole series of public relation games following the fine:

- Bad Apple. Pretending it is just a few bad apples spoiling it (“we know that a small minority have let us down” from Bob Diamond’s letter to staff). Resorting to coporate values and insisting that whatever happened is counter to the company culture. Diamond stated “the founding principles of Barclays were "honesty, integrity, plain dealing". That is how I have behaved throughout my whole career."

- Red Herring. Putting in a diversion from the matter at hand (in this case allegations about a nod and a wink from the Bank of England Deputy Governor Tucker)

- Semi-sorry. As Bob Diamond said in his Parliamentary hearing “sorry” but not “personally culpable”. He was also surprised at the behaviour, since the bank had a “no jerk rule” (really)

- Bypassed. Insisting that you were not aware of the behaviour (a specialty of News International as well) and feigning a little incompetence. (To which Andrea Leadsom responded “you must be living in a parallel universe”, and another member commented “you seem to have seen nothing, heard nothing, know nothing. You're in charge and you're not even asking questions internally and people who are acting criminally are not coming to you. You must be grossly incompetent if you were not complicit”)

Bob Diamond declared many times in his Parliamentary hearing how he “loved” Barclays, but this is no doubt cold comfort to employees and customers of the bank. Now he is gone, and the golden parachute is set to be 17 million pound sterling.

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