Tag: Barclays

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Liability for LIBOR

Barclays’ Chief Executive, Bob Diamond, has resigned following revelations that Barclays staff had been involved in rigging the LIBOR in the period 2005–9, including the financial crisis of 2007–9.

So what is the LIBOR; how is it set; what were the reasons for Barclays (and other banks, as will soon be revealed) attempting to manipulate the rate; and what were the consequences?

The LIBOR, or London interbank offered rate, is the average of what banks report that they would have to pay to borrow from one another in the inter-bank market. Separate LIBORs are calculated for 15 different lending periods: overnight, one week, one month, two months, three months, six months, etc. The rates are set daily as the average of submissions made to Thomson Reuters by some 15 to 20 banks (a poll overseen by the British Bankers’ Association). Thomson Reuters then publishes the LIBORs, along with all of the submissions from individual banks which are used to calculate it.

Many interest rates around the world are based on LIBORs, or their European counterpart, EURIBORs. They include bond rates, mortgage rates, overdraft rates, etc. Trillions of dollars worth of such assets are benchmarked to the LIBORs. Thus manipulating LIBORs by even 1 basis point (0.01%) can result in millions of dollars worth of gains (or losses) to banks.

The charge, made by the Financial Services Authority, is that Barclays staff deliberately under- or overstated the rate at which the bank would have to borrow. For example, when interbank loans were drying up in the autumn of 2008, Barclays staff were accused of deliberately understating the rate at which they would have to borrow in order to persuade markets that the bank was facing less difficulty than it really was and thereby boost confidence in the bank. In other words they were accused of trying to manipulate LIBORs down by lying.

As it was the LIBORs were rising well above bank rate. The spread for the one-month LIBOR was around 1 to 1.2% above Bank Rate. Today it is around 0.1 to 0.15% above Bank Rate. Without lying by staff in Barclays, RBS and probably other banks too, the spread in 2008 may have been quite a bit higher still.

The following articles look at the issue, its impact at the time and the aftermath today.

Articles
A Libor primer The Globe and Mail, Kevin Carmichael (3/7/12)
60 second guide to Libor Which? (3/7/12)
Explaining the Libor interest rate mess CNN Money (3/7/12)
Fixing Libor Financial Times (27/6/12)
LIBOR in the News: What it is, Why it’s Important Technorati, John Sollars (2/7/12)
Libor rigging ‘was institutionalised at major UK bank’ The Telegraph, Philip Aldrick (1/7/12)
Barclays ‘attempted to manipulate interest rates’ BBC News, Robert Peston (27/6/12)
The Libor Conspiracy: Were the Bank of England and Whitehall in on it? Independent, Oliver Wright, James Moore , Nigel Morris (4/7/12)
Fixing LIBOR The Economist (10/3/12)
Cleaning up LIBOR? The Economist (14/5/12)
Eagle fried The Economist, Schumpeter (27/6/12)
Barclays looks like the victim Financial Post, Terence Corcoran (3/7/12)
Inconvenient truths about Libor BBC News, Stephanie Flanders (4/7/12)
Timeline: Barclays’ widening Libor-fixing scandal BBC News (5/7/12)
The elusive truth about Barclays’ lie BBC News, Robert Peston (4/7/12)
Rate Fixing Scandal Is International: EU’s Almunia CNBC, Shai Ahmed (4/7/12)
Bank-Bonus Culture to Blame for Barclays Scandal The Daily Beast, Alex Klein (3/7/12)
Libor scandal ‘damaging’ for City BBC Today Programme, Andrew Lilico and Mark Boleat (5/7/12)

Data
Libor rate fixing: see each bank’s submissions Guardian Data Blog, Simon Rogers (3/7/12)
Sterling interbank rates Bank of England

Questions

  1. Using data from the Bank of England (see link above), chart two or three LIBOR rates against Bank rate from 2007 to the present day.
  2. For what reason would individuals and firms lose from banks manipulating LIBOR rates?
  3. Why would LIBOR manipulation be more ‘effective’ if banks colluded in their submissions about their interest rates?
  4. Why might the Bank of England and the government have been quite keen for the LIBOR to have been manipulated downwards in 2008?
  5. To what extent was the LIBOR rigging scandal an example of the problem of asymmetric information?
  6. In the light of the LIBOR rigging scandal, should universal banks be split into separate investment and retail banks, rather than erecting some firewall around their retail banking arm?
  7. What are the arguments for and against making attempts to manipulate LIBOR rates a criminal offences?
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Shareholders rebel – is the tide about to turn?

Executive pay has been a contentious issue in recent years, with bankers’ bonuses stealing many headlines. Shareholders have been voicing their opinions on bonuses paid to top executives and the management teams at the banks in question are unlikely to be too pleased with the turn of events.

Nearly one third of shareholders from Credit Suisse opposed the bonuses that were set out to be paid to their executives; more than 50% of shareholders from Citigroup rejected the plan to pay their Chief Executive £9.2m for 2011 and, at the end of April, almost a third of shareholders at Barclays refused to support the bank’s pay awards. Barclay’s Chief Executive was to be paid £17.7m, but this revolt is just another indication of how the tide is turning against having to pay big bonuses to retain the best staff.

Bonuses are essentially there to reward good performance. For example, if a company or bank achieves higher than expected profits, you may support a bonus for the key individuals who achieved this. However, in the case of Barclays, the £17.7m package for the Chief Executive was to be paid, despite him saying that his bank’s performance in 2011 was ‘unacceptable’. I wonder what bonus might have been suggested had the performance been ‘acceptable’?

Revolts over big bonuses are not a new thing for 2012. Over the past few years, more and more resentment has been growing for the huge pay increases received by top managers. Many big companies around the world have seen shareholder revolts and this could mean the tide is beginning to turn on big bonuses. The following articles consider this contentious issue.

Credit Suisse and Barclays investors revolt over pay Reuters, Matt Scuffham and Katharina Bart (27/4/12)
Aviva rocked by shareholder rebellion over pay Guardian, Jill Treanor and Julia Kollewe (3/5/12)
Tide turns on bank bonuses as revolt hits UK Scotsman, Bill Jamieson and Tom Peterkin (28/4/12)
Barclays AGM: ‘We can’t pay zero bonuses, the consequences would be dire’ Telegraph, Harry Wilson (27/4/12)
Barclays shareholders have spoken. The overpaid must listen Guardian, Chuka Umunna (27/4/12)
Barclays suffers executive pay backlash Financial Times, Patrick Jenkins (27/4/12)
Aviva to review pay policy amid investor concerns Wall Street Journal, Jessica Hodgson and Vladimir Guevarra (30/4/12)
UBS faces shareholder opposition over executive pay New York Times, Julia Werdigier (3/5/12)
Low returns stir Europe-wide revolt on bankers’ pay Reuters, Steve Slater and Sinead Cruise (25/4/12)
Barclays targeted over bonuses Telegraph, Louise Peacock (9/4/12)
UBS gets stinging rebuke from shareholders on pay Reuters, Katharina Bart (3/5/12)
Vince Cable urges investors to keep up the pressure on executive pay Guardian, Jill Treanor (4/5/12)

Questions

  1. To what extent do you think high bonuses are the most important variable to a company in retaining the best staff?
  2. In The Telegraph article by Harry Wilson, Barclays’ Chairman is quoted as saying: ‘We can’t pay zero bonuses, the consequences would be dire’. What would be the consequences if Barclays did pay zero bonuses?
  3. What would be the consequence if all UK firms paid zero bonuses?
  4. How would smaller bonuses affect shareholder dividends?
  5. The Guardian article by Chuka Umunna says that ‘excessive pay and rewards for failure are bad for shareholders, the economy and society.’ Why is this?
  6. Should those receiving big bonuses be forced to give them up, if their company has under-performed?
  7. What are the main arguments for and against paying out big bonuses?