It has been little over a week before the first details regarding Barclays manipulation of the Libor rate became worldwide news. The news send yet another shockwave through financial markets. Let's recap the main events and see what we can expect in the next weeks.
Libor stands short for London Interbank Offered Rate. The interest rate is crucial as it directly and indirectly affects trillions in consumer and corporate loans as well as financial derivatives. The process at which the rate is determined is still very old fashioned. Large global banks report their "estimated" borrowing costs at other large financial institutions on a daily basis.
It is crucial that banks make an estimate yet they do not actually borrow or lend at these rates. As such they are not "putting their money where their mouth is". To make the system even more dodgy, the oversight of the process is done by the British Bankers Association, which is a banker's trade association instead of an independent regulatory authority. Is it a coincidence that resigning Chairman of Barclays, Marcus Agius also fulfilled that role at the British Bankers Association?
How far stretched is the fraud?
Barclays already admitted to rigging the Libor rates after settling with UK and US banking regulators for 290 million pound. Most likely this is only the top of the iceberg and we can expect other global banks to be involved in the scandal as well as banking regulators have already opened up their investigations. The key question is whether it were merely the traders which have been manipulating rates to make money on their trades or do a favor for their key clients, or whether "false submissions" were driven by politicians and/or regulators.
We can be certain that traders have been manipulating the rate for their own gains as the chat records between traders clearly show. More interesting is the question whether regulators or government officials did steer big banks into making false Libor submissions in order to create the illusion of a more resilient banking sector during the financial turmoil. Tomorrow's hearing of Paul Tucker, the prime candidate to replace Mervyn King as the Governor of the Bank of England, will provide much more clearance on this topic when he testifies in Parliament.
The news of the settlement and the newest scandal involving banks caused renewed public anger amidst the public. Within a week Barclays (BCS) lost both its Chairman Marcus Agius and its Chief Executive Officer Bob Diamond. Shares in the ADR lost 14% over the last month marking year to date losses of 7% amidst the impact of the scandal which might lead to renewed calls of tighter regulations and a split up of the retail and investment banking activities.
Former CEO Bob Diamon actually defended the job of Paul Tucker as a representative of the Bank of England in parliament last week. In 2008 Diamond and Tucker had a phone call regarding the financial health of the bank amidst the economic turmoil. Diamond said that notes of the conversation revealed that Tucker and the British government were concerned about the high Libor submissions of Barclays which could be seen as a sign of funding stress. Diamond stated that his staff misinterpret the notes and saw it as an instruction to submit lower Libor rates in order to look more resilient, while it was not the intent of the Bank of England.
Expect more news to hit the wires in the coming days. On Friday the German regulator BaFin already started an investigation into Deutsche Bank (DB) which suspended two traders over the weekend. Furthermore the new hearings in the UK parliament tomorrow could provide some more news flow. Additionally, it is widely expected that many more banks are involved in the process of rigging the Libor rates in recent years in order to benefit trading positions of the bank or of its clients.
Expect more court cases, more settlements and resignations of top banking officials. This scandal is most likely worldwide and public outrage could reach new highs if evidence appears of regulators or political officials being involved in the process.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.