Jerome Favre/Bloomberg NewsRobert Diamond, chief of Barclays, said the bank worked to fix problems and cooperated with the authorities.Regulators delivered the first blow in a major investigation into whether big banks had improperly set key interest rates that affected how consumers and companies borrowed money around the world.
On Wednesday, Barclays agreed to pay $450 million to resolve accusations that it had tried to manipulate rates to benefit the bank’s own bottom line. At the height of the financial crisis, regulators say, the big British bank reported bogus figures that in some cases had influenced a benchmark for student loans, credit cards and mortgages.
The Barclays deal, struck with regulators in Washington and London and the Justice Department, caps a multiyear investigation that yielded one of the largest regulatory penalties tied to the financial crisis. The settlement is the first in a series of potential cases against other financial firms, including HSBC, Citigroup and JPMorgan Chase.
Regulators are worried that big banks set certain rates to their own advantage, in an effort to lift profits during the crisis and fend off concerns that their health was ailing. Such benchmarks, including the London interbank offered rate, or Libor, and the Euro interbank offered rate, or Euribor, are used to determine the lending rates for corporations and consumers.
The Barclays settlement, which offers clues about the scope of the inquiry, may provide a template for future actions. The deal also lays the groundwork for broader reform measures that could reshape how banks report benchmark rates. As part of the settlement, Barclays agreed to adopt new controls and measures to prevent a repeat of the regulatory breakdown.
Dave Cross PhotographyDavid Meister, the commission’s enforcement director.“The honesty and integrity of a benchmark like Libor is critical because Libor itself courses through all the facets of borrowing and lending in our economy,” said Gary Gensler, chairman of the Commodity Futures Trading Commission, the American regulator involved in the Barclays case. “Banks must not attempt to influence” the rates, he said, to protect “their reputation or the profitability of their trading positions.”
In the Barclays case, regulators say they uncovered “pervasive” wrongdoing that spanned a four-year period and touched top rungs of the firm, including members of senior management and traders stationed in London, New York and Tokyo. A 45-page complaint laid bare the scheme that unfolded from 2005 to 2009, describing how Barclays had made false reports with the aim of manipulating rates to increase the bank’s profits. Barclays was also accused of “aiding attempts by other banks to manipulate” Euribor.
Traders seeking favorable rates received a welcome reception from bank employees who set the benchmark. “Always happy to help,” one employee said in an e-mail.
The bank also submitted artificially low figures to depress Libor and deflect scrutiny about its health. At the time, the bank faced concerns that its high borrowing rates pointed to a weak financial position. The practice of submitting false numbers prompted unease among some employees, who worried the bank was “being dishonest by definition.”
“When a bank acts in its own self-interest by attempting to manipulate these rates for profit, or by submitting false reports that result from senior management orders to lower submissions to guard the bank’s reputation, the integrity of benchmark interest rates is undermined,” said David Meister, the trading commission’s enforcement director.
The Barclays settlement represents a record for the C.F.T.C., Wall Street’s smallest watchdog. The trading commission levied a $200 million penalty, the largest in its history.
The Financial Services Authority in London imposed a record $92.8 million fine, while the Justice Department had a $160 million penalty. As part of the accord, the Justice Department agreed not to prosecute Barclays.
“For this illegal conduct, Barclays is paying a significant price,” said Lanny Breuer, an assistant attorney general.
Federal prosecutors are continuing a criminal investigation into other banks and their employees. And while no Barclays executives were named in the actions, the London authorities are still investigating some employees in the matter, according to a person briefed on the matter.
“Barclays’ misconduct was serious, widespread and extended over a number of years,” Tracey McDermott, acting director of enforcement and financial crime at the Financial Services Authority, said in a statement.
Robert Diamond, the bank’s chief executive, expressed contrition and underscored the recent changes at Barclays. Mr. Diamond said that he and three other top executives had voluntarily agreed to give up their bonuses this year. Most of the traders involved in the case have left the bank, according to people briefed on the matter.
“The events which gave rise to today’s resolutions relate to past actions which fell well short of the standards to which Barclays aspires in the conduct of its business,” Mr. Diamond said in a statement. “When we identified those issues, we took prompt action to fix them and cooperated extensively and proactively with the authorities.”
In the aftermath of the financial crisis, global regulators are examining whether many of the world’s largest banks tried to manipulate Libor, a measure of how much banks charge each other for loans. Analysts say the Libor system, which was created in 1986 and is overseen by Thomson Reuters on behalf of the British Bankers’ Association, does not provide sufficient transparency about how banks set their daily interest rates for borrowing in the financial markets.
At least nine agencies, including the Justice Department, the Financial Services Authority of Britain and Financial Supervisory Agency of Japan, have centered their investigations on Libor. Authorities are also looking into the activity surrounding similar benchmarks known as Tibor, the Tokyo interbank offered rate, and Euribor.
Regulators in the United States have issued subpoenas to several banks — including Bank of America, UBS and Citigroup — to understand how Libor was set. The Competition Bureau of Canada is investigating the activities of JPMorgan, Deutsche Bank and several other major banks.
Libor and the other interbank rates are published daily, based on surveys from banks about the rates at which they could borrow money in the financial markets. Currently, more than a dozen financial firms, including JPMorgan, Bank of America and HSBC, provide information to set the daily American dollar Libor rate.
The Barclays case reveals that the bank shared information between its treasury departments, which help to set Libor, and its trading units, which buy and sell financial products on a daily basis. Financial institutions are expected to maintain so-called Chinese walls between divisions, to avoid sharing confidential information in pursuit of a profit.
But when a Barclays trader sought an advantageous yet bogus rate, an employee responded. “For you, anything,” one employee who submitted false rates said. Or, as another employee put it, “Done … for you big boy.”
The rosy feelings appeared to be mutual. One trader, after receiving a favorable rate from a bank employee, declared: “I love you.” Another trader called a colleague a “superstar” for playing ball.
Traders even sent themselves electronic calendar notifications to remind themselves about what rates to seek from Barclays employees who submitted the figures, according to regulators.
Some of the most troubling actions, regulators say, occurred between 2007 and 2009. As bank financing costs rose to new highs after the collapse of Lehman Brothers, regulators worried that firms might have submitted low interest rate figures that underpin Libor, making their financial positions look stronger.
Amid speculation that the bank was struggling to raise money, Barclays’ senior management asked employees to lower the rates submitted to the Libor committee, according to the regulatory filings. Management wanted the bank’s rates in line with rivals. Senior Barclays executives instructed employees not to put your “head above the parapet.”
Some employees resisted, but eventually followed orders from top executives, according to regulatory documents. One concerned employee called the rates “patently false.”
“I will reluctantly, gradually and artificially get my libors in line,” another person said.