In June, the UK and US authorities fined Barclays Bank £290m for manipulating money market benchmark rates, such as the London Interbank Offered Rate (Libor) and the Euro Interbank Offered Rate (Euribor).
Before 2007, traders at Barclays manipulated rates in order to obtain a financial benefit. Subsequently, during the global financial crisis, Barclays manipulated rates due to reputational concerns.
Lord Turner, the head of the Financial Services Authority (FSA), told a parliamentary committee that it hadn't occurred to him before 2009 that Libor could be manipulated. However, anecdotal evidence suggests that Libor submissions may have been manipulated over a long period. Banks and regulators may have been aware of these practices for some time but did not take corrective action.
Barclays' senior management and board of directors have indicated that they became aware of the problem only recently. The banks still offer the same excuse as JP Morgan Jnr in 1933: "Since we have not more power of knowing the future than any other men, we have made many mistakes (who has not during the past five years?), but our mistakes have been errors of judgement and not of principle."
The practice appears blatant, and warnings were ignored. Canadian court documents indicate that a UBS employee contacted employees at other banks with a view to achieving a "certain movement" in yen Libor. The correspondence does not attempt to hide the actions from superiors or express concern about any breach of internal or regulatory rules.
In a Singapore lawsuit against RBS for wrongful dismissal, Tan Chi Min alleged that he and his fellow traders were regularly consulted by senior managers and personnel responsible for setting the bank's yen Libor submission. The filing alleges that there was no regulation, policy or guidelines for submissions. RBS's position is that Mr Tan was dismissed for trying to manipulate the bank's rate setting to benefit his trading positions between 2007 and 2011.
In 2007 and 2008, it appears that Barclays' compliance department did not act on three separate internal warnings about conflicts of interest and "patently false" rate submissions. In an opinion piece in The Independent on 7 July this year, a former Barclays employee alleged that problems with Libor fixings were escalated by several people up to their directors and further within the organisation.
Recent disclosures indicate that UK and US regulators knew that banks were posting artificial rates which did not correspond to their actual costs of borrowing. In April 2008, a Barclays employee notified the Federal Reserve Bank of New York that the bank was underestimating its borrowing costs. A transcript of the telephone call is revealing: "We know that we're not posting, um, an honest Libor … we are doing it because, um, if we didn't do it ... it draws, um, unwanted attention on ourselves."
On 1 June 2008, three and a half months before the Lehman Brothers collapse, Timothy Geithner, then the president of the New York Fed, emailed Mervyn King, the Governor of the Bank of England, urging changes in the way Libor was calculated. Internal New York Fed reports reveal concern about possible misreporting of Libor. These concerns were not made public, nor were steps taken to address the problem. Regulators, it seems, feared that the truth would destabilise already panicked markets.
Large banks are deemed too big too fail (TBTF), a concept now codified in bank regulations. It remains to be seen whether they and their employees are too big to jail (TBTJ).
The FSA's case was based on breaches of various parts of its Principles for Businesses code, specifically Principle 5 which requires that a firm must observe proper standards of market conduct. Its report concluded: "The definitions of Libor and Euribor require submissions from contributing banks based on their subjective judgement of borrowing or lending in the interbank market. The definitions do not allow for consideration of derivatives traders' positions or of concerns over the negative media perception of high Libor submissions."
The actions prima facie constitute manipulation and fraud, violating applicable securities laws. They may also breach anti-trust and criminal law. Evidence released shows possible criminal intent. Emails indicate awareness of the illegality: "don't talk about it too much"; "don't make any noise about it please"; "this can backfire against us". Individual traders and the bank which is responsible for its employees' actions would be liable.
Facing media attention and public fury, the US and UK authorities are belatedly exploring possible criminal charges.
Satyajit Das is the author of Extreme Money and Traders Guns & Money