Barclays' LIBOR, Euribor, Interest Rate Derivative Fraud Scandal Seems Serious (CFTC, FSA PDFs)

1M Euribor/Submission (h/t SoberLook)
The LIBOR, Euribor, and interest rate derivative fraud scandal at Barclays has been flooding the media for weeks now, so I thought I'd post all of the details for archive purposes. I embedded CFTC and FSA (UK's Financial Services Authority) documents that explain what happened. Barclays was fined $200 million by the CFTC, $160 million by the USDOJ, and £59.5 million by the FSA. Now it looks like "taxpayer-owned banks Lloyds and RBS could face Libor fines."

As noted in my previous post, these interbank lending rates are tied to trillions of loans and interest rate derivatives. So they are kind of important. Now banks have big lawsuits and litigation costs to deal with. Does Dick Bove still think we are in a new golden age of banking?

  • US Attorneys General Jump On The Lieborgate Bandwagon; 900,000+ Lawsuits To Follow, And What Happens Next? (Zero Hedge)
  • The World of LIBOR and Worst Case Lawsuits (TF Market Advisors)
  • LIBOR scandal set to rock U.S. as experts warn it could be 'the biggest consumer fraud in history' (DailyMail)
  • Libor price fixing case is getting work for lawyers (Reuters)
  • U.S. states look to enter Libor manipulation case (Reuters)
  • Rate Scandal Stirs Scramble for Damages (DealBook)
  • The Libor Scandal's Threat to Growth (WSJ)
  • Libor Manipulation Probe and Litigation Update (JDSupra)

According to articles and Twitterers I read, some people believe that this LIBOR scandal is just getting started and will eventually spread to U.S. banks. Others believe it's not a big deal and just another day at the office. I see this as just more too-big-to-fail bank fraud. But, I keep forgetting that manipulation and fraud is legal at these banks. In the FSA document below, read emails by Barclays' LIBOR and Euribor submitters and interesting rate derivative traders blatantly trying to manipulate rates to benefit trading positions. Also look at charts in the FSA's report. These traders were also colluding with other traders and submitters at other banks (and emailing HEDGE FUNDS? WTF?), which seems serious to me. Maybe not. Read an email exchange below. Unfortunately I couldn't find any interest rate derivative raps (CDO rap here).

Attempts to influence other banks’ submissions

88. Barclays’ Derivatives Traders attempted to influence the EURIBOR (and to a much
lesser extent, US dollar LIBOR) submissions of other banks by making requests to
external traders. One of the Derivatives Traders also embarked on co-ordinated strategies to align Barclays’ positions with traders at other banks and to influence the EURIBOR rates published by the EBF.

89. Between February 2006 and October 2007, Barclays’ Derivatives Traders made at
least 63 requests to external traders with the aim that those traders would pass on the requests for EURIBOR and US dollar LIBOR submissions to their banks’ submitters. 56 of those requests related to EURIBOR submissions. Five Derivatives Traders made the requests to external traders.

90. For example, on 7 July 2006, Trader E made an internal request to a Submitter for a low one month EURIBOR submission. Trader E also made the same request to 20 external traders at Panel Bank 1 and Panel Bank 2.

91. On 28 February 2007, Trader B made a request to an external trader in relation to
three month US dollar LIBOR “duuuude… whats up with ur guys 34.5 3m fix…tell him to get it up!!” The external trader responded “ill talk to him right away”.

92. On occasion, more concerted efforts were made to influence both Barclays’ and
other banks’ EURIBOR submissions, consisting of a series of communications over
the course of time. In several key examples, one of Barclays’ Derivatives Traders
co-ordinated with external traders to try to influence EURIBOR submissions at
Barclays and other banks during the Relevant Period (and that trader instructed more
junior Derivatives Traders at Barclays to do the same)" (read more email exchanges in the FSA document)

So how was fraud not going on in every other aspect of banking at this time? Bond and loan trading, credit default swaps, insider trading on corporate events, etc. These banks were, and still are, giant insider trading financial meth factories. And why the hell were hedge funds on these emails?

"Trader E intended to “go long the march future”, in other words to build up a
trading position in interest rate futures contracts that would benefit from a low
three month EURIBOR rate. Trader E also stated in an internal email that he
understood a trader at Panel Bank 1 and an individual at a hedge fund were also building up long positions. If a trader had a long position in futures contracts referenced to three month EURIBOR expiring in March 2007, he would benefit from a low three month EURIBOR rate on 19 March 2007 (the Monday prior to the third Wednesday in March, an IMM date);"

"Other individuals with no apparent vested interest in the strategy commented on the
EURIBOR rates on 19 March 2007. Trader D stated in an instant message to an
external trader “look at the games in EURIBOR today […] I am sure a few names
made a killing”
. A trader at a hedge fund communicated with Trader E, also on 19
March 2007, stating “it’s becoming dangerous to trade in 3m imms […], especially
when Barclays sets the 3m very low […] it does draw attention to you guys. It
doesn’t look very professional”

Here are the documents.

FSA (Financial Services Authority ) vs. Barclays

CFTC vs. Barclays

And read U.S. Department of Justice vs. Barclays (via DealBook).

Here is quick info from the CFTC press release:

"LIBOR and Euribor

LIBOR – the London Interbank Offered Rate – is among the most important benchmark interest rates in the world’s economy, and is a key rate in the United States. LIBOR is based on rate submissions from a relatively small and select panel of major banks, including Barclays, and is calculated and published daily for several different currencies by the British Banker’s Association (BBA). Each panel bank’s submission is also made public, and the market can therefore see each bank’s independent assessment of its own borrowing costs. LIBOR is supposed to reflect the cost of borrowing unsecured funds in the London interbank market.

Euribor, which is calculated in a similar fashion by the European Banking Federation (EBF), is another globally important rate that measures the cost of borrowing in the Economic and Monetary Union of the European Union.

LIBOR impacts enormous volumes of swaps and futures contracts, commercial and personal consumer loans, home mortgages and other transactions. For example, U.S. Dollar LIBOR is the basis for the settlement of the three-month Eurodollar futures contract traded on the Chicago Mercantile Exchange (CME), which had a traded volume in 2011 with a notional value exceeding $564 trillion. In addition, according to the BBA, swaps with a notional value of approximately $350 trillion and loans amounting to $10 trillion are indexed to LIBOR. Euribor is also used internationally in derivatives contracts. In 2011, over-the-counter interest rate derivatives referenced to Euro rates had a notional value in excess of $220 trillion, according to the Bank for International Settlements. LIBOR and Euribor are relied upon by countless large and small businesses and individuals who trust that the rates are derived from candid and reliable submissions made by each of the banks on the panels.

Barclays’ Unlawful Conduct to Benefit Derivatives Trading Positions

As the Order shows, Barclays, in pursuit of its own self-interest, disregarded the fundamental principle that LIBOR and Euribor are supposed to reflect the costs of borrowing funds in certain markets. Barclays’ traders located at least in New York, London and Tokyo asked Barclays’ submitters to submit particular rates to benefit their derivatives trading positions, such as swaps or futures positions, which were priced on LIBOR and Euribor. Barclays’ traders made these unlawful requests routinely, and sometimes daily, from at least mid-2005 through at least the fall of 2007, and sporadically thereafter into 2009. The Order relates that, for example, one trader stated in an email to a submitter: “We have another big fixing tom[orrow] and with the market move I was hoping we could set [certain] Libors as high as possible.”

In addition, certain Barclays Euro swaps traders, led at the time by a senior trader, coordinated with and aided and abetted traders at other banks in each other’s attempts to manipulate Euribor, even scheming to impact Euribor on key standardized dates when many derivatives contracts are settled or reset.

The traders’ requests were frequently accepted by Barclays’ submitters, who emailed responses such as “always happy to help,” “for you, anything,” or “Done…for you big boy,” resulting in false submissions by Barclays to the BBA and EBF. The traders and submitters also engaged in similar conduct on fewer occasions with respect to Yen and Sterling LIBOR.

Barclays’ Unlawful Conduct at the Direction of Senior Management

The CFTC Order also finds that Barclays, acting at the direction of senior management, engaged in other serious unlawful conduct concerning LIBOR. In late 2007, Barclays was the subject of negative press reports raising questions such as, “So what the hell is happening at Barclays and its Barclays Capital securities unit that is prompting its peers to charge it premium interest in the money market?” Such negative media speculation caused significant concern within Barclays and was discussed among high levels of management within Barclays Bank. As a result, certain senior managers within Barclays instructed the U.S. Dollar LIBOR submitters and their supervisor to lower Barclays’ LIBOR submissions to be closer to the rates submitted by other banks and not so high as to attract media attention.

According to the Order, senior managers even coined the phrase “head above the parapet” to describe high LIBOR submissions relative to other banks. Barclays’ LIBOR submitters were told not to submit at levels where Barclays was “sticking its head above the parapet.” The directive was intended to fend off negative public perceptions about Barclays’ financial condition arising from its high LIBOR submissions relative to the submissions of other panel banks, which Barclays believed were too low given the market conditions.

Despite concerns being raised by the submitters that Barclays and other banks were, for example, “being dishonest by definition” and that they were submitting “patently false” rates, the submitters followed the directive and submitted artificially lower rates. The senior management directive for low U.S. Dollar LIBOR submissions occurred on a regular basis during the global financial crisis from August 2007 through early 2009, and, at limited times, for Yen and Sterling LIBOR during the same period. As the U.S. Dollar senior submitter said in October 2008 to his supervisor at the time, “following on from my conversation with you I will reluctantly, gradually and artificially get my libors in line with the rest of the contributors as requested. I disagree with this approach as you are well aware. I will be contributing rates which are nowhere near the clearing rates for unsecured cash and therefore will not be posting honest prices.”"
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