Weekend Economists Waiting for FDR July 13-15, 2012

[Demeter]

6. Calculated Deal in a Rate-Rigging Inquiry

http://www.nytimes.com/2012/07/14/business/in-barclays-inquiry-the-calculation-in-making-a-deal-common-sense.html

...If the Justice Department was looking for a textbook case of white-collar financial crime — including a conspiracy that was flourishing at the height of the financial crisis — this would seem tailor-made. As the facts released by the government make clear, there were two separate but overlapping schemes to manipulate Libor within Barclays. Yet the bank secured a nonprosecution agreement and agreed to pay a penalty of more than $450 million, a comparatively paltry sum for a bank that had more than £32 billion ($50 billion) in revenue in 2011. “The perception so far has been that the regulators have been toothless,” John C. Coffee Jr., professor of law and specialist in white-collar crime at Columbia Law School, told me this week.

The first Barclays scheme, which flourished from 2005 to 2007, and continued sporadically as recently as 2009, involved Barclays traders who were trying to manipulate Libor and another benchmark rate to enhance their trading profits. Libor is set each day by the British Bankers’ Association based on rates submitted by a panel of banks that included Barclays. The submissions are supposed to reflect the rates at which banks can borrow from other banks. Because of the huge amounts of derivative contracts riding on Libor, even a tiny shift can have enormous consequences.

Senior Barclays managers have said they knew nothing about this scheme, and Robert E. Diamond Jr., chief executive at the time, told Parliament last week that he was “physically sick” when he read the e-mails describing the activity. He added, “I think people who do things that they’re not supposed to do should be dealt with harshly.”

The second scheme ran from approximately August 2007 to January 2009, a period covering the fall of Lehman Brothers and the worst of the financial crisis. Senior Barclays managers instructed traders to submit falsely low rates to counter the perception that other banks were charging high rates to lend to Barclays, a sign of financial weakness. Various e-mails and other documents suggest that Barclays did this to protect its reputation, to avoid appearing to be an “outlier” among major banks and, according to one document quoted by the Justice Department, to keep Barclays’ “head below the parapet” so it did not get “shot” off. (Barclays agreed not to contest any of the statement of facts released by the government.) ,,,