Libor scandal
This dwarfs by orders of magnitude any financial scam in the history of markets.[1][2]
The Libor scandal was a series of fraudulent actions connected to the Libor (London Inter-bank Offered Rate) and also the resulting investigation and reaction. Libor is an average interest rate calculated through submissions of interest rates by major banks across the world. The scandal arose when it was discovered in 2012 that banks were falsely inflating or deflating their rates so as to profit from trades, or to give the impression that they were more creditworthy than they were.[3] Libor underpins approximately $350 trillion in derivatives. It is currently administered by Intercontinental Exchange (ICE), which took over running the Libor in January 2014.[4]
The banks are supposed to submit the actual
Because Libor is used in US
On 27 July 2012, the Financial Times published an article by a former trader which stated that Libor manipulation had been common since at least 1991.[8] Further reports on this have since come from the BBC[9][10] and Reuters.[11] On 28 November 2012, the Finance Committee of the Bundestag held a hearing to learn more about the issue.[12]
The
Significant reforms, in line with the Wheatley Review, came into effect in 2013 and a new administrator took over in early 2014.
As of November 2017[update], 13 traders had been charged by the UK Serious Fraud Office as part of their investigations into the Libor scandal. Of those, eight were acquitted in early 2016.[23][24][25] Four were found guilty (Tom Hayes, Alex Pabon, Jay Vijay Merchant and Jonathan James Mathew),[26] and one pleaded guilty (Peter Charles Johnson).[27] The UK Serious Fraud Office closed its investigation into the rigging of Libor in October 2019 following a detailed review of the available evidence.[28] It is estimated that the seven-year investigation of the Libor scandal in the UK cost at least £60 million.[29] BBC Radio 4 produced a programme, The Lowball Tapes, that questions whether the right people were convicted for rigging rates.[30] The programme also alleges that at the height of the financial crisis, the Bank of England was giving instructions to banks to rig Libor to a much greater extent than the traders ever did on their own account. This was subsequently published as a book.[31]
Early reports
WSJ study
Hi Guys, We got a big position in 3m libor for the next 3 days. Can we please keep the libor fixing at 5.39 for the next few days. It would really help. We do not want it to fix any higher than that. Tks a lot.
Barclays Bank trader in New York to submitter,
13 September 2006[32]
On 16 April 2008, The Wall Street Journal released an article, and later study, suggesting that some banks might have understated borrowing costs they reported for the Libor during the 2008 credit crunch that may have misled others about the financial position of these banks.[33][34] In response, the BBA claimed that the Libor continued to be reliable even in times of financial crisis. Other authorities contradicted The Wall Street Journal article saying there was no evidence of manipulation. In its March 2008 Quarterly Review, the Bank for International Settlements stated that "available data do not support the hypothesis that contributor banks manipulated their quotes to profit from positions based on fixings."[35] Further, in October 2008, the International Monetary Fund published its regular Global Financial Stability Review which also found that "Although the integrity of the U.S. dollar Libor-fixing process has been questioned by some market participants and the financial press, it appears that U.S. dollar Libor remains an accurate measure of a typical creditworthy bank's marginal cost of unsecured U.S. dollar term funding."[36]
A study by economists
Awareness of central banks
In November 2008, the Governor of the
The
The documents show that in early 2008, a memo written by then New York Fed President
Regulatory investigations
The Wall Street Journal reported in March 2011 that regulators were focusing on Bank of America Corp., Citigroup Inc. and UBS AG in their probe of Libor rate manipulation.
The Canadian
Breadth of scandal becomes apparent
By 4 July 2012, the breadth of the scandal was evident and became the topic of analysis on news and financial programs that attempted to explain the importance of the scandal.[54] Two days later, it was announced that the UK Serious Fraud Office had also opened a criminal investigation into manipulation of interest rates. The investigation was not limited to Barclays.[55][56] It has been reported since then that regulators in at least ten countries on three different continents are investigating the rigging of the Libor and other interest rates.[57][58] Around 20 major banks have been named in investigations and court cases.[59]
Early estimates are that the rate manipulation scandal cost US states, counties, and local governments at least $6 billion in fraudulent interest payments, above $4 billion that state and local governments have already had to spend to unwind their positions exposed to rate manipulation.[60] An increasingly smaller set of banks are participating in setting the Libor, calling into question its future as a benchmark standard, but without any viable alternative to replace it.[61]
United States investigations
The
On 4 October 2012, Republican
Timothy Lee, a capital markets expert at the Federal Housing Finance Agency Office of Inspector General, said in a 3 November memo that Fannie Mae and Freddie Mac may have lost more than $3 billion because of the manipulation.[64]
Parliamentary investigation
Appearing before Parliament on 16 July, Jerry del Missier, a former senior Barclays executive, said that he had received instructions from Robert Diamond to lower rates after Diamond's discussions with bank regulators. He said that he had received information of a conversation between Diamond and Paul Tucker, deputy governor of the Bank of England, in which they had discussed the bank's financial position at the height of the 2008 financial crisis. It was his understanding that senior British government officials had instructed the bank to alter the rates. Del Missier's testimony followed statements from Diamond in which he denied that he had told his deputies to report false Libor rates. Speaking before Parliament the previous week, Tucker stated that he had shared concerns regarding Barclays Libor rates because the markets might view Barclays to be at risk if its Libor submissions continued to be higher than those of other international banks. In the midst of the Lehman Brothers collapse, there was concern the bank might need to be bailed out if the financial markets perceived it was a credit risk. Tucker told the committee, "I wanted to make sure that Barclays' day-to-day funding issues didn't push it over the cliff."[65]
Civil lawsuits
Cartel operation
It's just amazing how Libor fixing can make you that much money or lose if opposite. It's a cartel now in London.
RBS trader in Singapore to Deutsche Bank trader,
19 August 2007[66]
In court documents filed in Singapore, Royal Bank of Scotland (RBS) trader Tan Chi Min told colleagues that his bank could move global interest rates and that the Libor fixing process in London had become a cartel. Tan in his court affidavit stated that the Royal Bank of Scotland knew of the Libor rates manipulation and that it supported such actions. In instant messages, traders at RBS extensively discussed manipulating Libor rates. In a released transcript of a 21 August 2007 chat, Jezri Mohideen, who was the head of yen products in Singapore, asked to have the Libor fixed in a conversation with other traders:[66]
- Mohideen: "What's the call on the Libor?"
- Trader 2: "Where would you like it, Libor that is?"
- Trader 3: "Mixed feelings, but mostly I'd like it all lower so the world starts to make a little sense."
- Trader 4: "The whole HF [hedge fund] world will be kissing you instead of calling me if Libor move lower."
- Trader 2: "OK, I will move the curve down 1 basis point, maybe more if I can."
In another conversation on 27 March 2008, Tan asked that RBS raise its Libor submission and noted that an earlier lower figure that the bank had submitted had cost his team £200,000. In other released instant chats, Tan made it clear that the Libor fixing process had become a highly lucrative money making cartel. Tan in a conversation with traders at other banks, including Deutsche Bank's Mark Wong said on 19 August 2007:[66]
- Tan: "It's just amazing how Libor fixing can make you that much money or lose if opposite. It's a cartel now in London."
- Wong: "Must be damn difficult to trade man, especially [if] you [are] not in the loop."
Mortgage rate manipulation
Homeowners in the US filed a class action lawsuit in October 2012 against twelve of the largest banks which alleged that Libor manipulation made mortgage repayments more expensive than they should have been.
Statistical analysis indicated that the Libor rose consistently on the first day of each month between 2000 and 2009 on the day that most adjustable-rate mortgages had as a change date on which new repayment rates would "reset". An email referenced in the lawsuit from the Barclay's settlement, showed a trader asking for a higher Libor rate because "We're getting killed on our three-month resets."[67] During the analysed period, the Libor rate rose on average more than two basis points above the average on the first day of the month, and between 2007 and 2009, the Libor rate rose on average more than seven and one-half basis points above the average on the first day of the month.[68]
The five lead plaintiffs included a pensioner whose home was repossessed after her subprime mortgage was securitised into Libor-based collateralised debt obligations, sold by banks to investors, and foreclosed. The plaintiffs could number 100,000, each of whom has lost thousands of dollars.[69] The complaint estimates that the banks earned hundreds of millions, if not billions of dollars, in wrongful profits as a result of artificially inflating Libor rates on the first day of each month during the complaint period.[68]
Municipalities losses
The city of
Municipalities began using interest rate swaps to
To hedge costs on the sale of variable interest rate bonds, which can rise and fall with the market, local governments, such as Baltimore, purchased interest rate swaps which exchange a variable interest rate for a fixed interest rate.[73] In a swap deal, when the interest rate rises, the swap seller pays the local government the increased cost on the bond, while when the interest rate falls, the swap seller saves and pays the local government the decreased cost on the bond. The interest rate swap mechanism generally works well; however, between 2007 and 2010 the payments to local governments on their swaps artificially decreased but the cost on their bonds remained at actual market rates. This was because most interest rate swaps are linked to the Libor interest rate, while municipal bond rates are linked to the SIFMA Municipal Bond Index interest rate. During the financial crisis the two benchmark rates decoupled. Municipalities continued to pay on their bonds at the actual market Sifma rate but were paid on their interest rate swaps at the artificially lower Libor rate.[72]
Reactions
The cost to colluding and suspect banks from litigation, penalties, and loss of confidence may drive down
United States
US experts such as former
Former Citigroup chairman and CEO
Europe
Mainland European scholars discussed the necessity of far-reaching banking reforms in light of the current crisis of confidence, recommending the adoption of binding regulations that would go further than the
Recommendations
The British Bankers' Association said on 25 September 2012 that it would transfer oversight of Libor to UK regulators, as proposed by Financial Services Authority managing director Martin Wheatley and CEO-designate of the new Financial Conduct Authority.[14] On 28 September, Wheatley's independent review was published, recommending that an independent organisation with government and regulator representation, called the Tender Committee, manage the process of setting Libor under a new external oversight process for transparency and accountability. Banks that make submissions to Libor would be required to base them on actual inter-bank deposit market transactions and keep records of their transactions supporting those submissions. The review also recommended that individual banks' Libor submissions be published, but only after three months, to reduce the risk that they would be used as a measure of the submitting banks' creditworthiness. The review left open the possibility that regulators might compel additional banks to participate in submissions if an insufficient number do voluntarily. The review recommended criminal sanctions specifically for manipulation of benchmark interest rates such as the Libor, saying that existing criminal regulations for manipulation of financial instruments were inadequate.[15] Libor rates could be higher and more volatile after implementation of the reforms, so financial institution customers may experience higher and more volatile borrowing and hedging costs.[16] The UK government agreed to accept all of the Wheatley Review's recommendations and press for legislation implementing them.[17]
Reforms
As of July 2013, the administration of Libor has itself become a regulated activity overseen by the UK's Financial Conduct Authority.[82] Furthermore, knowingly or deliberately making false or misleading statements in relation to benchmark-setting had been made a criminal offence in UK law under the Financial Services Act 2012.[18][20][22] The Danish, Swedish, Canadian, Australian and New Zealand Libor rates were terminated.[18][82]
From the end of July 2013, only five currencies and seven maturities were to be quoted every day (35 rates), reduced from 150 different Libor rates – 15 maturities for each of ten currencies, making it more likely that the rates submitted are underpinned by real trades.[18][82]
Since the beginning of July 2013, each individual submission from the banks is embargoed for three months to reduce the motivation to submit a false rate to portray a flattering picture of creditworthiness.[18][83]
As of July 2013, a new code of conduct, introduced by a new interim oversight committee, built on this by outlining the systems and controls firms need to have in place around Libor. For example, each bank must now have a named person responsible for Libor, accountable if there is any wrongdoing. The banks must keep records so that they can be audited by the regulators if necessary.[18][84][85]
As of early 2014,
Australia
As of June 2015, Australian regulators were still investigating involvement of Australian banks in manipulation of key market interest rates. The
Fines
Pls go for 5.36 libor again, very important that the setting comes as high as possible ... thanks.
Barclays Bank trader in New York to submitter,
29 July 2007[32]
On 27 June 2012,
Barclays manipulated rates for at least two reasons. Routinely, from at least as early as 2005, traders sought particular rate submissions to benefit their financial positions. Later, during the
Following the interest rate rigging scandal, Marcus Agius, chairman of Barclays, resigned from his position.[98] One day later, Bob Diamond, the chief executive officer of Barclays, also resigned from his position.[99][100] Bob Diamond was subsequently questioned by the Parliament of the United Kingdom regarding the manipulation of Libor rates. He said he was unaware of the manipulation until that month, but mentioned discussions he had with Paul Tucker, deputy governor of the Bank of England.[101] Tucker then voluntarily appeared before parliament, to clarify the discussions he had with Bob Diamond. He said he had never encouraged manipulation of the Libor, and that other self-regulated mechanisms like the Libor should be reformed.[102]
On 19 December 2012,
if you keep 6s [i.e., the six-month JPY Libor rate] unchanged today ... I will f—ing do one humongous deal with you ... Like a 50,000 buck deal, whatever ... I need you to keep it as low as possible ... if you do that .... I'll pay you, you know, 50,000 dollars, 100,000 dollars... whatever you want ... I'm a man of my word.
Subsequent trades between UBS and this broker generated more than $250,000 in fees to the broker.[105][106]
In September 2013, ICAP settled allegations that they had manipulated Libor. The United States Department of Justice charged three former employees, and ICAP paid $65 million to the US's Commodity Futures Trading Commission and £14 million ($22 million) to Britain's Financial Conduct Authority.[107]
In October 2013, Rabobank was fined €774 million by US, UK and Dutch regulators .[108]
In December 2013 the
On 23 April 2015, Deutsche Bank agreed to a combined US$2.5 billion in fines – a US$2.175 billion fine by American regulators, and a €227 million penalty by British authorities – for its involvement in the Libor scandal. The company also pleaded guilty to wire fraud, acknowledging that at least 29 employees had engaged in illegal activity. It will be required to dismiss all employees who were involved with the fraudulent transactions.[111] However, no individuals will be charged with criminal wrongdoing. In a Libor first, Deutsche Bank will be required to install an independent monitor.[112] Commenting on the fine, Britain's Financial Conduct Authority director Georgina Philippou said "This case stands out for the seriousness and duration of the breaches ... One division at Deutsche Bank had a culture of generating profits without proper regard to the integrity of the market. This wasn't limited to a few individuals but, on certain desks, it appeared deeply ingrained."[111] The fine represented a record for interest rate related cases, eclipsing a $1.5 billion Libor related fine to UBS, and the then-record $450 million fine assessed to Barclays earlier in the case.[111][112] The size of the fine reflected the breadth of wrongdoing at Deutsche Bank, the bank's poor oversight of traders, and its failure to take action when it uncovered signs of abuse internally.[112]
As of 2015, at least three banks – JPMorgan, Citigroup, and Bank of America – were still under investigation for their involvement in the fraud.[112]
See also
References
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{{cite web}}
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- ^ "Barclays chairman resigns over interest rate rigging scandal". NDTV profit. Reuters. 2 July 2012. Archived from the original on 4 July 2012. Retrieved 2 July 2012.
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- ^ Trotman, Andrew (4 July 2012). "Bob Diamond questioned by MPs on Barclays Libor scandal: as it happened". The Telegraph. London. Archived from the original on 9 July 2012. Retrieved 10 July 2012.
- ^ Moulds, Josephine (9 July 2012). "Bank of England deputy governor Paul Tucker fights Libor accusations – as it happened". The Guardian. London. Archived from the original on 3 October 2013. Retrieved 10 July 2012.
- ^ a b c d "UBS fined $1.5bn for Libor rigging". BBC. 19 December 2012. Archived from the original on 19 December 2012. Retrieved 20 December 2012.
- ^ "CFTC Orders UBS to Pay $700 Million Penalty to Settle Charges of Manipulation, Attempted Manipulation and False Reporting of LIBOR and Other Benchmark Interest Rates - U.S. COMMODITY FUTURES TRADING COMMISSION". www.cftc.gov. Archived from the original on 13 April 2018. Retrieved 7 May 2018.
- ^ Christopher Matthews (20 December 2012). "LIBOR Scandal: Yep, It's as Bad as We Thought". Time. Archived from the original on 25 January 2013.
- ^ "Archived copy" (PDF). Archived (PDF) from the original on 23 August 2014. Retrieved 11 March 2014.
{{cite web}}
: CS1 maint: archived copy as title (link) pp.12 - ^ Scott, Mark; Julia Werdigier (25 September 2013). "ICAP to Pay $87 Million Fine in Libor-Fixing Case". The New York Times. Archived from the original on 26 September 2013. Retrieved 26 September 2013.
- ^ "Megaboete Rabobank Libor-affaire". Archived from the original on 21 October 2017.
- ^ "Antitrust: Commission fines banks € 1.71 billion for participating in cartels in the interest rate derivatives industry" (Press release). Brussels: European Commission. 4 December 2013. Archived from the original on 7 December 2013. Retrieved 18 December 2013.
- ^ "Lloyds Bank fined $370m for Libor rigging".
- ^ a b c "Deutsche Bank fined record $2.5 billion in rate rigging inquiry". Reuters. 23 April 2015. Archived from the original on 23 April 2015. Retrieved 23 April 2015.
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External links
Barclays Bank
- Order Instituting Proceedings, In the matter of: Barclays Bank PLC, United States, Commodity Futures Trading Commission, 27 June 2012.
- Statement of Facts, Non-prosecution agreement: Barclays Bank PLC, United States, Department of Justice, 26 June 2012.
- Final Notice, Imposing financial penalty: Barclays Bank PLC Archived 10 July 2012 at the Wayback Machine, United Kingdom, Financial Services Authority, 27 June 2012.
Citigroup
- Administrative Action on Citigroup Global Markets Japan Inc, Japan, Financial Services Agency, 16 December 2011.
Deutsche Bank
- Order Instituting Proceedings, In the matter of: Deutsche Bank AG, United States, Commodity Futures Trading Commission, 23 April 2015.
- Statement of Facts, Deferred prosecution agreement: Deutsche Bank AG, United States, Department of Justice, 23 April 2015.
- "Consent Order" (PDF). In the Matter of: Deutsche Bank AG. New York State Department of Financial Services. 23 April 2015. Archived from the original (PDF) on 30 April 2015. Retrieved 30 June 2015.
- Final Notice 2015: Deutsche Bank AG, United Kingdom, Financial Conduct Authority, 23 April 2015.
ICAP Europe Limited
- Order Instituting Proceedings, In the matter of: ICAP Europe Limited, United States, Commodity Futures Trading Commission, 25 September 2013.
- Final Notice, Imposing financial penalty: ICAP Europe Ltd, United Kingdom, Financial Conduct Authority, 25 September 2013.
- United States of America v. Darrell Read, Daniel Wilkinson, and Colin Goodman, United States, Department of Justice, 25 September 2013.
Lloyds Bank
- Order Instituting Proceedings, In the matter of: Lloyds Banking Group PLC, United States, Commodity Futures Trading Commission, 28 July 2014.
- Final Notice, Imposing financial penalty: Lloyds Bank PLC and Bank of Scotland PLC, United Kingdom, Financial Services Authority, 28 July 2014.
Rabobank
- Order Instituting Proceedings, In the matter of: Rabobank, United States, Commodity Futures Trading Commission, 29 October 2013.
- Statement of Facts, Deferred prosecution agreement: Rabobank, United States, Department of Justice, 29 October 2013.
- Final Notice, Imposing financial penalty: Rabobank, United Kingdom, Financial Conduct Authority, 29 October 2013.
- Libor and Euribor investigation findings and measures for Rabobank, Netherlands, De Nederlandsche Bank (the Dutch Central Bank), 29 October 2013.
- United States of America v. Paul Robson, Paul Thompson, Tetsuya Motomura, United States, Department of Justice, 13 January 2014.
- Robson et al Complaint, Exhibit of Facts, United States, Department of Justice, 13 January 2014.
Royal Bank of Scotland
- Order Instituting Proceedings, In the matter of: Royal Bank of Scotland PLC, United States, Commodity Futures Trading Commission, 6 February 2013.
- Plea agreement: United States of America v. RBS Securities Japan, United States, Department of Justice, 5 February 2013.
- Final Notice, Imposing financial penalty: Royal Bank of Scotland PLC Archived 19 March 2013 at the Wayback Machine, United Kingdom, Financial Services Authority, 6 February 2013.
- Administrative actions against RBS Securities Japan Limited, Japan, Financial Services Agency, 12 April 2013.
UBS
- Order Instituting Proceedings, In the matter of: UBS AG, United States, Commodity Futures Trading Commission, 19 December 2012.
- Statement of Facts, Non-prosecution agreement: UBS AG, United States, Department of Justice, 18 December 2012.
- Final Notice, Imposing financial penalty: UBS AG Archived 23 August 2014 at the Wayback Machine, United Kingdom, Financial Services Authority, 19 December 2012.
- FINMA Summary Report UBS LIBOR Archived 1 February 2013 at the Wayback Machine, Switzerland, Swiss Financial Market Supervisory Authority, 19 December 2012.
- United States of America v. Tom Hayes and Roger Darin, United States, Department of Justice, 12 December 2012.
- Hayes et al Complaint, Exhibit of Facts, United States, Department of Justice, 12 December 2012.
- Administrative Actions against UBS Securities Japan Ltd and UBS AG, Japan Branches, Japan, Financial Services Agency, 16 December 2011.
European Union
- Euro Interest Rate Derivatives Cartel: Barclays, Deutsche Bank, RBS, Société Générale, Belgium, Directorate-General for Competition, 12 December 2013.
- Swiss Franc Interest Rate Derivatives Cartel: JP Morgan, RBS, Belgium, Directorate-General for Competition (European Commission), 21 October 2014.
- Yen Interest Rate Derivatives Cartel: Citigroup, Deutsche Bank, JP Morgan, RBS, RP Martin, UBS, Belgium, Directorate-General for Competition (European Commission), 12 December 2013.
Government
- The Wheatley Review of LIBOR: Final Report, United Kingdom, HM Treasury, 28 September 2012.
- Principles for Financial Benchmarks: Final Report, Spain, International Organization of Securities Commissions, July 2013.
- Documents concerning Barclays and the Libor matter, United States, Federal Reserve Bank of New York, 13 July 2012.
- Correspondence with the NY Fed and British Bankers' Association in relation to Libor, United Kingdom, Bank of England, 13 July 2012.