Barclays’ Big Settlement – Just Banks Being Banks

 In an “above the fold” front page article in the June 28, 2012 Wall Street Journal, we learn that Barclays PLC, one of the world’s largest banks,[1] “…agreed to pay $453 million in fines to U.S. and U.K. regulators after admitting that traders and executives tried to manipulate [LIBOR] interest rates tied to loans and financial contracts around the world.”

For many folks who had adjustable rate mortgages during the Easy Credit Era, circa 2005 -2007, they may know about LIBOR, since it was the ubiquitous index to which interest rate adjustments were tied.  And they may remember being pleasantly surprised when their interest rates adjusted downward, thus reducing the monthly payments on their first or second mortgages. LIBOR stands for “London Inter-Bank Offered Rate” and it represents the average interest rate at which a select group of large banks engage in unsecured borrowing between each other.  For more information on LIBOR, go to this link.

This story began back in 2008 when questions were being raised about whether Big Banks were manipulating the LIBOR process by influencing their submissions that are used to calculate the rates which are then used as global benchmarks. According to the WSJ article, LIBOR “…is set each day in London based on estimates submitted by a panel of banks. The banks are supposed to say how much it would cost them to borrow from each other in different currencies over different time periods.”   Since this is published information, apparently some Big Banks submitted low-ball rates …”to avoid looking desperate for cash amid the financial crisis.”  However, reading somewhat between the lines, it appears that understating their own rates at which they were borrowing was only part of the problem. Although it is not as clear as it could be from the article, it appears that Barclay’s traders were also attempting to profit on their bets that were linked to LIBOR by influencing their bank’s submitted rates.  In other words, the lowball figures were not just for reputation, but also to manipulate rates for profit.

Some of the quotes in the WSJ article are classic, and prove a point I have been making for some time; many of the senior execs at Big Banks have a skewed view of ethics.  In fact, some might say they have no ethics, as we understand that word to mean in ordinary parlance.  Herewith, the gems:

  • A senior manager at Barclays said in 2008 while discussing the inaccurate LIBOR rates: ‘We’re clean, but we’re dirty-clean, rather than clean-clean…’
  • A representative of the British Bankers’ Association responded: “No one’s clean-clean.”

Riddle me this, Batman: What is “dirty-clean”?  And why can’t someone be “clean-clean”?

These quotes are a kind of banker-speak  and reflect – as I have said in prior posts – a life lived in shades of gray. To lie, but not too boldly; to cheat, but only in matters of business; and to steal, but only from nameless victims.

To be “clean-clean” as the BBA representative said, would require one to live by a credo that applies equally to their personal life and their business life – something presumably impossible.

So think about this: Most professions belong to associations that espouse principles or ethical rules – however aspirational or unattainable – but they have something.   Not so for Big Banks.  It appears that getting caught, as in the Barclay’s case, is simply the cost of doing business.

That is why the statement by Barclays’ Chief Executive, Robert Diamond about the huge fines, ring hollow.  He lamented that the “…past actions …fell well short of the standards to which Barclays aspires in the conduct of its business.”  This is the quintessential truism when one is caught with their hand in the cookie jar.  Note also the reference to “past actions.”  The inference, of course, is that was then and this is now – “We’ve recently grown a conscience.” [UPDATE: Bloomberg reports today – Tuesday, July3, 2012 – that Mr. Diamond has resigned amid the furor over the LIBOR story. PCQ]

But what is Barclays going to do, going forward?  Will they promise to go straight?  Contribute to a widows and orphans fund?  Write the Golden Rule on a chalkboard 500 times?  No such luck. Instead, according to the WSJ article: “As part of its settlement, Barclays pledged to cooperate with continuing investigations into individuals and rival firms.”  [My italics. PCQ]

So who might be thrown under the bus?   Barclay’s “…cooperation is expected to help officials wrest settlements from additional banks, which could increase the total penalties to billions of dollars, people close to the investigation said.”  Some of the other Big Banks under investigation include Citigroup, Inc., HSBC Holdings PLCJ.P. Morgan Chase, Lloyds Banking Group PLC, and Royal Bank of Scotland Group PLC.   So, apparently there is no honor among thieves.  That’s what happens when everyone is “dirty-clean.”

[1] According to Wikipedia: “Barclays PLC (LSE: BARC, NYSE: BCS) is a British multinational banking and financial services company headquartered in London, United Kingdom. It has operations in over 50 countries and territories across Africa, Asia, Europe, North America and South America and around 48 million customers. As of 31 December 2010 it had total assets of US$2.33 trillion, the fourth-largest of any bank worldwide (after BNP Paribas, Deutsche Bank and HSBC).”