PUBLISHED: 18:38 EST, 28 June 2012 | UPDATED: 18:38 EST, 28 June 2012
Some of America’s top banks are set to be dragged into a major criminal investigation of a global interest rate-fixing scandal about to engulf some of Wall Street’s biggest institutions.
The worldwide probe centres on claims traders at Barclays colluded with rival banks to keep interest rates at levels to their benefit.
Barclays agreed to pay a whopping $453million in fines to the U.S. Justice Department and the UK’s Financial Services Authority.
But it emerged tonight the bank had struck a deal of ‘extraordinary co-operation’ with regulators in Washington and London – potentially exposing collusion on interest rates among banks across the globe.
The bank admitted to manipulating key interest rates, increasing pressure on other banks to cooperate in a probe that could cost the financial industry billions of dollars.
The agreement came after coordinated investigations lasting years and is just the first in a series of potential cases against other financial firms, including HSBC, Citigroup and JPMorgan Chase.
But it is Barclays’ decision to co-operate with authorities that has sent a wave of panic through financial institutions across America.
It is believed that part of Barclays chief executive Bob Diamond’s agreement with American authorities would be to give up other top banks around the world who may be involved.
HOW BARCLAYS TRADERS CONSPIRED TO FIX THE MARKETS
Between 2005 and 2009, more than 200 requests were sent, usually by email or instant messenger – by traders to the Barclays Libor submitters.
In one example of several provided by the FSA, a trader emailed the Barclays Libor submitter in March 2006, writing: ‘The big day [has] arrived… My NYK are screaming at me about an unchanged 3(month) libor. As always, any help wd be greatly appreciated. What do you think you’ll go for 3(month)?’
The submitter replied: ‘I am going 90 altho 91 is what I should be posting.’
The trader thanked him, saying: ‘..when I retire and write a book about this business your name will be written in golden letters.’
The submitter then replied: ‘I would prefer this [to] not be in any book!’
In another example from April 2006, a trader requested low one month and three month US dollar Libor rates shortly before the submission was due.
He asked: ‘If it’s not too late low 1m and 3m would be nice, but please feel free to say “no”… Coffees will be coming your way either way, just to say thank you for your help in the past few weeks.’
The submitter replied: ‘Done… for you big boy.’
‘This is the proverbial tip of the iceberg,’ said Hervey Pitt, former chairman of the Washington-based Securities and Exchange Commission.
He added: ‘It is in Barclays’ interest to prove the old adage that misery loves company and I expect they’ll be implicating a lot of their colleagues in other banks.’
As a part of the deal, Barclays admitted its role in rigging the LIBOR (London Interbank Offered Rate) and EURIBOR interbank crucial interest rates to mask the scale of their bad debts.
And American authorities say Barclays is not alone, with a number of other banks also taking part in a full-scale, global fraud.
A senior manager at Citigroup’s Japanese operation left the firm late last year after his division was temporarily banned from trading linked to Libor and its Tokyo equivalent, Tibor, by theauthorities.
Giant Swiss bank UBS said it had approached regulators with information over abuses of the rate-setting system.
The Libor rate is crucial, since it is a key benchmark for trillions of pounds’ worth of financial products.
The $450million fine on Barclays from the UK and U.S. authorities, issued on Wednesday, is likely to be only the beginning of a wave of punishments and civil suits for damages against other banks caught up in the global web of deceit.
Experts said banks might have to set aside billions of dollars in damages to cover their liabilities resulting from the conspiracy.
Between 2005 and 2009, certain Barclays traders requested that their LIBOR and EURIBOR submitters contribute rates that would benefit the financial positions held by those traders.
Assistant Attorney General Lanny A. Breuer said in a statement: ‘For years, traders at Barclays encouraged the manipulation of LIBOR and EURIBOR submissions in order to benefit their financial positions; and, in the midst of the financial crisis, Barclays management directed that U.S. Dollar LIBOR submissions be artificially lowered.
‘For this illegal conduct, Barclays is paying a significant price.’
The requests were made by traders in New York and London, via electronic messages, telephone conversations and in-person conversations.
The employees responsible for the LIBOR and EURIBOR submissions went along those requests numerous times in submitting the bank’s contributions, according to the Justice Department.
On some occasions, Barclays’ submissions affected the fixed interest rates.
The Justice Department’s assistant director in charge, James W. McJunkin, said in a statement: ‘Barclays Bank’s illegal activity involved manipulating its submissions for benchmark interest rates in order to benefit its trading positions and the media’s perception of the bank’s financial health.’
In the UK, Labour leader Ed Miliband has also demanded a criminal probe into the interest rate scandal.
Asked how much wider the rate-fixing scandal might go, British Chancellor George Osborne told MPs: ‘HSBC and RBS are two of the banks under investigation, but international banks such as UBS and Citigroup are under investigation too, partly for activities conducted in this country.’
Mr Osborne said the total impact on the economy and on individuals was ‘extremely difficult to work out, because the Libor rate was manipulated up as well as down’.
‘Sometimes the rate was too low for the true market price, and sometimes it was too high,’ he said.
‘The Financial Services Authority has made it clear, however, that that contributed to a risk to the country’s financial stability, and the cost of that is enormous.’
At least eight agencies, including Britain’s Financial Services Authority and Japan’s Financial Supervisory Agency, have carried out probes into the LIBOR and EURIBOR scandal.
A broader LIBOR probe dates to at least 2011 and includes Japanese, Canadian and Swiss authorities.
Last year, UBS agreed to cooperate with U.S. investigators in exchange for conditional immunity from prosecution.
Earlier this year, in documents filed in Ontario Superior Court, a Canadian antitrust regulator said that a ‘cooperating party’ provided information on how the alleged LIBOR manipulation took place.
HOW BANK ‘TRIED TO COVER ITS TRACKS AND LIED TO REGULATOR’
Barclays was yesterday shown to have ruthlessly covered up its attempts to manipulate interest rates, as well as lying to the City regulator.
Emails released by the Financial Services Authority reveal that a whistleblower warned the bank was being ‘dishonest by definition’, but was ignored by his boss.
On December 4, 2007 – just a few months after the credit crunch began – a Barclays worker emailed ‘Manager E’, laying out his fears about the bank’s behaviour.
But the bank failed to do anything about it, providing further damning evidence of a culture of fraud and manipulation.
In the email, the ‘submitter’ – the person responsible for filing the daily Libor rates to the British Bankers’ Association – said he was ‘feeling increasingly uncomfortable’.
He said: ‘My worry is that we [both Barclays and the contributor bank panel] are being seen to be contributing patently false rates.
‘We are therefore being dishonest by definition and are at risk of damaging our reputation in the market and with the regulators.’
If he had a ‘free hand’, he wanted to submit a one-month, dollar Libor rate of around 5.45 per cent, but he actually filed a rate of 5.30 per cent.
Although the bank’s compliance department contacted the FSA two days after the email was sent, it failed to tell the whole truth, the regulator said.
Its report states: ‘Compliance relayed an unspecific concern about the levels at which other banks were setting US dollar Libor (at rates lower than Barclays’ submissions).
‘Compliance did not inform the FSA that Barclays’ own submissions were incorrect or that the submitter’s determination of where Libor should be set was being over-ruled.’
It said Barclays had told it the submissions were ‘within a reasonable range and could be justified’.
On another occasion, the emails reveal that senior staff at the bank simply lied to the regulator when quizzed about Libor submissions.
On March 5, 2008, the FSA asked the bank’s ‘money market desk’ about its Libor rates. A submitter discussed his response with his manager, saying he wanted to file a rate of ‘Libor plus 20 [basis points]’ – but was told to file a lower rate.
The manager, ‘Manager D’, said: ‘Yeah, I wouldn’t go there for the moment… I would rather we sort of left that at like zero or something.’
The lower rate of Libor plus nothing was filed.
The submitter wrote: ‘It is a sad thing really, because, you know, if they’re [the FSA] truly trying to do something useful… it would be nice if they knew.’