Barclays and the LIBOR Scandal - Assignment Example

Barclays and the LIBOR scandal Who is hurt and who benefits from the manipulation of LIBOR? LIBOR (London Inter-Bank Offered Rate) is utilized for the settlement of derivative contracts in the money market. The British Bankers Association (BBA), every day questions 18 banks in respect of the rates in which they use to borrow funds. All the 18 banks are required to submit responses to the Thomson Reuters data collection service that handles LIBOR submissions. Submissions are required to be made in respect of the price they would offer to loan money. Thomson Reuters then publishes the highest and the lowest four submissions. At various points from 2007 to 2009, Barclays was seen to submit rates which were below the presumed cost of borrowing, so as to be able to manage the market’s sensitivity relating to financial feasibility. The company’s goal was to keep submission lower than other competing firms. It was seen that Barclays could make huge sums of profits, even by the slightest manipulation of the LIBOR rates (Rose and Sesia 1). It was quite clear that the bank’s employees had undertaken such activities to earn higher profits and to limit the losses which arise from the derivatives trading. Barclay’s traders were trying to consider their own profit motives and earn dishonest profits. The dishonest LIBOR submissions had led towards dampening market speculations. Although the bank was able to make adequate profits, it could not sustain the manipulation process for long. It can be stated that the benefits of such manipulation was very limited and short-lived. However, the negative impacts of the Barclays LIBOR manipulation were quite extensive. The submitted rates had a wide felt negative impact in the derivatives market. The firm had lost the trust of customers and traders during the crisis period, and had also created negative waves in the media regarding its viability in the market. Post the Barclays scandal, 20 more banks were questioned and vividly examined by regulators. In the whole process of LIBOR manipulation, since interbank rates were manipulated, derivative transactions and banks lending to investors had also been impacted in a negative manner (Monticini and Thornton 345). Who was most responsible for the manipulation of LIBOR? Bob Diamond, the former CEO of Barclays had blamed a small group of employees for the violation of the LIBOR rates. Bob had denied any personal wrongdoing against the allegations made in respect of rigging the LIBOR and limiting the market and media speculations. Bob also went to the extent of stating that Barclays was more honest in submitting its LIBOR rates as compared to other banks (Surowiecki 25). He also stated that other banks were also equally indulgent in LIBOR rigging and the same was evident from their troubled scenario and later on becoming partly nationalized so that they could be in a position to borrow at lower rates than Barclays. However, the government representatives overlooking the case had found that Bob Diamond was mainly responsible for the LIBOR scandal. Even though Barclays had grown significantly under the leadership of Bob, many claimed that he lacked the knowledge of retail banking and achieved success majorly on the basis of risks and gambling (Hou and Skeie 1). The Federal Reserve Bank of New York (NY Fed) had raised the questions in respect of the manner in which the LIBOR rates are set. NY Fed had stated that the system could lead towards deliberate misreporting by banks. It was also pointed out by many, that the lack of efficiency and competencies of the regulatory authorities were to be blamed for creating the havoc relating to LIBOR misappropriation. The regulators did not take efforts towards quantifying the gains and the losses which arose out of derivative trading. Evidence regarding trader’s compensations was also not affected (Aldrick 1). As a leader, how should you respond when you know that your competitors are cheating? How should you respond when you think regulators are asking you to cheat? Barclays could not have achieved manipulating the LIBOR without the carelessness of the regulatory authorities. The swap traders of Barclays had also facilitated altering the LIBOR rates. Investigation into the case clearly revealed that the company had undergone a planned manipulation. The administrative authorities should have monitored the activities of traders and ensured that they do not manipulate the settings so as to gain greater profits. The concerns raised by NY Fed had already made the banks quite aware of the facts related to the manner in which LIBOR could have been manipulated. Barclay’s senior executives and Bob should not have ignored the matter and should have imposed measures to regulate the banks activities (Prado and Rawlinson 111). Barclay’s traders were tempted to report wrong LIBOR rates as the firms competitors were also seen to engage in reporting artificially low rates of borrowing. However as responsible leaders, manipulation is not the way to deal with investments made in different types of assets and enhance the overall level of the firm acquiring different types of competition. The company could have procured different types of capital market derivative instruments to mitigate the risks arising out of the loss of revenues due to competitor policies (Koblenz, Labbate and Turner 4). When NY Fed raised concerns regarding the manipulation of LIBOR rates, most of the banks were seen to keep silent indicating their deep vested interests in engaging in LIBOR alterations. If Barclays and other banks had supported the concerns presented in respect of LIBOR violation, the scandal could have been prevented. The heavy fine and the resigning of Bob might serve as important lessons for other firms to decline themselves from participating in such activities (Dooley 565). What is your assessment of the efforts to fix LIBOR? What, if anything, would you do differently? LIBOR should continue to remain as the benchmark for providing interbank loans. It must continue to serve as important rates in unsecured interbank landings. However, considering the scope which the current system facilitates, banks can easily manipulate the LIBOR rates. Hence establishing proper regulations for managing LIBOR more efficiently must be established. Specific laws must be established in respect of the manner in which LIBOR is set and managed. It is also essential to shift the rate setting responsibilities from BBA to a new statutory authority. The new regulations must therefore focus upon developing adequate market transparency. A code of conduct must also be established for the banks who submit such rates. In cases where there is insufficient market data, LIBOR should not be set (Sichtermann 757). Compare and contrast the LIBOR scandal and the subprime mortgage meltdown. The subprime crisis had emerged out of the lack of liquidity and false interpretation of the underlying values of assets in a number of mortgage bonds and securities. The subprime crisis is alleged to have weakened the financial position of Barclays which eventually led the bank towards undertaking manipulative activities. However from a general perspective, the subprime crisis and the LIBOR scandal have many differences. The subprime crisis occurred due to lack of proper interpretation of market and how the same impacts the values of assets held as mortgages in a number of derivative instruments. However, in case of the LIBOR scandal, the main culprit was the lack of proper leadership and monitoring of activities on behalf of the banks administrators. The LIBOR scandal was seen to be done on purpose to earn illegitimate profits while the subprime crisis occurred out of uncertainty (Kelly 60). Works cited Aldrick, Philip. "Barclays: How the Libor scandal unfolded." The Telegraph 27.1 (2012): 1-5. Print. Dooley, Kristen. "I. The LIBOR Scandal." Rev. Banking & Fin. L. 32 (2012): 2-565. Print. Hou, David and David R. Skeie. "LIBOR: origins, economics, crisis, scandal, and reform." FRB of New York Staff Report 667.2 (2014): 1-7. Print. Kelly, Dorothy C. "Dishonesty and Dysfunction." CFA Magazine 23.5 (2012): 60-61. Print. Koblenz, Michael R., Kenneth M. Labbate and Carrie C. Turner. "LIBOR: Everything You Ever Wanted to Know But Were Afraid to Ask." The Journal of Business, Entrepreneurship & the Law 6.2 (2014): 4. Print. Monticini, Andrea and Daniel L. Thornton. "The effect of underreporting on LIBOR rates." Journal of Macroeconomics 37.1 (2013): 345-348. Print. Prado, Sylvain Michael and Ian Rawlinson. "Multi-fractal identification of sick markets: the LIBOR scandal case." Journal of Financial Transformation 36.1 (2013): 111-116. Print. Rose, Clayton S. and Aldo Sesia. “Barclays and the LIBOR Scandal.” Harvard Business School 9.313 (2014): 1-22. Print. Sichtermann, Jonathan R. "Adjusted Interest Rate Problem: How the Legal System Should Handle the Libor Scandal, The." UMKC L. Rev. 82.1 (2013): 757. Print. Surowiecki, James. "Bankers gone wild." The New Yorker 30 (2012): 25. Print. Read More