Fin24

Barclays scandal rattles global finance

2012-07-09 08:03

London - The Barclays rate-rigging scandal is sending shockwaves through world finance, putting ethics and regulation under scrutiny, and raising the prospect of criminal charges in a sector-wide global probe.

Britain's Serious Fraud Office said on Friday it will investigate the interbank rate manipulation scandal which has engulfed Barclays, forced three top resignations, tainted the City of London and sparked a political firestorm.

Barclays was fined £290m by British and US regulators just over one week ago, for attempted manipulation of Libor and Euribor interbank interest rates between 2005 and 2009.

Barclays, which is the parent company of Absa Group [JSE:ASA], became the first bank to be fined as part of a global probe into suspected manipulation of the twin interest rates that are crucial to the operation of short-term financing and global markets.

British lawmakers voted on Thursday to hold a parliamentary investigation into the scandal, instead of a full judicial inquiry.

"This is a multi-bank issue - albeit evidence and fines for other culpable banks will probably dribble out over a period of many months or years," said Ian Gordon, banking sector analyst at Investec.

"In broad terms, the issue itself and the associated fallout are damaging for the financial sector, both in reputational terms, the costs of investigation and fines - and any potential redress.

"Moreover, the issue helps to distract from and hence damage any initiatives to increase the flow of lending to the economy, with obvious negative consequences," Gordon said.

BNP Paribas analysts agreed that the crisis had the potential to engulf other lenders.

"As far as we are aware, the regulators have so far not disclosed a full list of banks being investigated," they said in a research note to clients.

They added that "additional fines... cannot be ruled out, although it's impossible to assess the exact exposures".

Libor (London Interbank Offered Rate) is a flagship instrument used all over the world, affecting what banks, businesses and individuals pay to borrow money. Euribor is the eurozone equivalent.

The Libor rate is calculated daily by data provider Thomson Reuters, on behalf of industry body the British Bankers' Association, using estimates from banks of their own binterbank rates.

Euribor is provided by the Brussels-based European Banking Federation, using data from 43 international banks.

Barclays has admitted that its traders had routinely submitted false readings, as they attempted to benefit their own lucrative derivatives deals.

The lender also posted lower Libor values from 2008 to prevent speculation that it would require a government bailout such as rival groups Lloyds and the Royal Bank of Scotland.

"Barclays attempted to manipulate and made false reports concerning two global benchmark interest rates, Libor and Euribor, on numerous occasions and sometimes on a daily basis over a four-year period, commencing as early as 2005," the Commodity Futures Trading Commission (CFTC) said on June 27.

The US watchdog added that employees at Barclays and its investment bank arm Barclays Capital had sought to boost trading positions to increase profits or minimise losses.

"In addition, the attempts to manipulate included Barclays' traders asking other banks to assist in manipulating Euribor, as well as Barclays aiding attempts by other banks to manipulate US Dollar Libor and Euribor."

Dan Wilsher, senior law lecturer at the City Law School, City University London, told AFP that the scandal raised serious questions over the conduct of some financial sector workers.

"The Libor scandal reveals a lack of honesty amongst dozens of employees - not just at Barclays - when the financial rewards are so big for cheating the system, the chances of getting caught slim and the pressure from management is very great," Wilsher said.

"The government will try to make it a crime to give wrong Libor figures but that will be a small step.

"We have not had a broad enquiry into the 'culture' of banking. At the moment the Leveson inquiry is looking at the ethics of the press following numerous scandals. People say we need the same for banking."

The government-appointed Independent Commission on Banking (ICB) ruled last year that British banks should separate their retail and investment arms to avoid a repeat of the global financial crisis, blamed in part on highly speculative trading practices.

The ICB also recommended that banks substantially increase their capital buffers.

"We have just completed a big ICB review, whose findings the government largely accepted and will pass laws to implement," Wilsher noted.

"This was a technical report on how to protect taxpayers and avoid another crash like that of 2008. It did not address the wider culture in detail but there are many different actions on this front.

"The EU restrictions on bonus payments are an important step in this direction. These need to be adopted globally. The US has introduced bans on trading activities by banks.

"Most importantly, banks need to hold much more capital and become much more risk averse. Hedge funds should take the risks and bear the consequences, not taxpayers."

Comments
  • charlesdumbwin.dumbwin - 2012-07-09 08:12

    Greedy investment bankers have plunged the world in this 'Great Recession'. We blame greedy bankers for this mess!!!

      squeegee.pilot - 2012-07-09 09:28

      Banksters! These scam artists are the worst thieves in the history of the planet.

      arthur.hugh - 2012-07-09 09:32

      About time these banks started being exposed.

      denny.cray - 2012-07-09 18:49

      They are one of the cogs for sure. I also blame the politicians for bailing them out and the central bankers (also banksters) for enabling them in the first place(and we the people for rolling over and accepting it all). "The issue which has swept down the centuries and which will have to be fought sooner or later is the people versus the banks." - Lord Acton

  • koos.vandermerwe.338 - 2012-07-09 08:53

    Not even a Stormers loss in the semi's would give me so much pleasure than to see ABSA going down.

  • freddy.vanwijk - 2012-07-09 08:59

    I wonder how badly this will affect ABSA and other banks. It means that there must be stricter scrutiny over investment bankers. Greedy investment bankers are to blame for this fiasco.

  • ianon.ym - 2012-07-09 09:06

    This is ONE thing we know about, what are all the other things we do not know about -

      arthur.hugh - 2012-07-09 09:33

      What about the fact that banks sell home loans for a profit, then think they still have the right to repo them.

      djmain1 - 2012-07-09 11:47

      Banks are the biggest scam artists of our time. They use securitization of loans which, in the Banks Act, they are specifically prohibited from doing. When you apply for a loan, the banks bundle up this loan with loans of other people and sell this bundle on the drivatives market - often for up to 3 times the amount of the loan. So, they get their money back immediately and make a handsome profit AND then expect you to pay interest!! Since they are basically selling your signature, they should at least make you aware of this and ideally share the proceeds of sale with you. This is criminal behavoiur and the bankers need to serve jailtime for this. Its illegal. What is more, the banks don't have the money they claim to loan you - they create it out of nothing. This is the cause of inflation and the current financial meltdown. The banks have a LOT to answer for. Criminals the lot of them.

      arthur.hugh - 2012-07-09 12:28

      Totally agree with you djmain1 - have you been following the Michael Tellinger case against Std Bank?

      djmain1 - 2012-07-09 13:26

      @Hugh - yes I have been following that - I'm pretty sure the banks are squirming and trying every means possible to squash that. I can't wait to here those arguments in open court.

      arthur.hugh - 2012-07-09 14:13

      Awesome, same here. I can't wait for the final outcome. Amazing how mainstream media hasn't covered this case.

      piet.strydom - 2012-07-09 14:51

      It seems what Tellinger objects to, is fractional reserve banking. It has ben in use for centuries. It is not the practice of fractional reserve banking as such that is a problem. It is the extent to which it is practised that is a problem. So Tellinger will have no luck in his consitutional application, much as everybody, including myself would like to give the banks a bloody nose. What is necessary is for the capital reserves which banks have to hold, should be increased gradually over the next 10 or 15 years.

  • badballie - 2012-07-09 12:47

    And a point of interest people, the reserve bank as well as all South African banks are all currently respondents in a class action by "The New Economic Rights Alliance" Please have a look at what they are fighting for and lend your support, to this good cause which seeks to end the state approved underhand dealings of banks in this country.

      piet.strydom - 2012-07-09 15:01

      Have you considered what would happen to your ability to get a home loan, should Tellinger succeeds in stopping fractional reserve banking?

  • paul.prinsloo3 - 2012-07-10 11:32

    Ramos being the worst manager and bank CEO in the country, and the least trusted one, comes as no surprise; after all, when she took over Transnet we still had a railway system of sorts, but when she moved to ABSA, not even the Metro Rail Services were functional anymore because Transnet's bungling (remember the Waterfront scandal that was vehemently denied after it was scrapped)had a domino effect on all forms of public transport. As an Afrikaner,I get cold shivers going into an ABSA Bank branch office, knowing that I am about to be screwed and that Afrikaners are held in contempt by Ms Ramos and her gang, in spite of her having been given ABSA, which had been established by Afrikaners in the 30s when the 'poor white problem', which was as bad as it is today, compelled Afrikaners to establish their own financial institutions. Ramos gives no recognition to the fact that she plays (recklessly) with an Afrikaner legacy that had such a good reputation when it was still Volkskas.

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