Rate-rigging scandal exposes banking system rot

The sense of frustration and despair within the British government and regulatory agencies over the behaviour of Barclays in submitting patently false returns to the London Interbank Offered Rate (LIBOR) panel, which sets global interest rate benchmarks, is palpable.

The avuncular Business Secretary, Vince Cable, spoke of the need to clean up what he termed the “cesspit of British banking”. The Governor of the Bank of England, Mervyn King, accused the bank of “deceitful manipulation”. The scandal, he said, provides evidence that “something went very wrong with the UK banking industry and we need to put it right”.

Perhaps the most telling reflection, however, came from Lord Adair Turner, the outgoing chairman of the Financial Services Authority, which is itself to be disbanded as a consequence of prior failure to police the market. For Lord Turner, quoted in the Financial Times, the manipulation revealed a “degree of cynicism and greed which is really quite shocking … and that does suggest that there are some very wide cultural issues that need to be strongly addressed”.

The disclosure and settlement derives from a joint transatlantic investigation into how the LIBOR rate is calculated and whether conflicts of interest meant that it is prone to manipulation. The investigation is being conducted by the United Kingdom’s FSA in conjunction with the United States Department of Justice and the Commodities and Futures Trading Commission (CFTC) with the assistance of the Securities and Exchange Commission.

Barclays has agreed to pay $US200m to the CFTC, $160m to settle related charges brought by the Department of Justice and $93.2m to the Financial Services Authority. The cumulative fines – the largest imposed on a bank since the financial crisis began – reflect the fact that the manipulation did not simply predate the crisis but continued throughout it. As noted by Tracey McDermott, the head of enforcement at the FSA, this was not the result of a single mistake. Rather, “Barclays’ misconduct was serious, widespread and extended over a number of years…This was possible because Barclays failed to ensure it had proper controls in place. Barclays’ behaviour threatened the integrity of the rates with the risk of serious harm to other market participants.”

It would appear, however, that Barclays was not acting alone. In an exceptionally revealing statement, the Department of Justice notes that “to the bank’s credit, Barclays also took a significant step towards accepting responsibility for its conduct by being the first institution to provide extensive and meaningful cooperation to the government. Its efforts have substantially assisted the Criminal Division in our ongoing investigation of individuals and other financial institutions in this matter.”

This sends an ominous signal that the scandal is far from over.