Barclays aggression turns sour

Barclays, one of the most aggressive banks on the block, has bounced back from plenty of controversies. But its Libor scandal may be a different matter.

Barclays’ record £290 million ($A450 million) settlement with UK and US regulators over the attempted manipulation of key benchmark interest rates is yet another example of a reckless investment bank operating under its own set of rules. The fact that numerous traders involved were able to falsify related data over a four-year period highlights the warped culture that has evolved in the bank in recent years.

As the extent of the attempted manipulation becomes more evident, and indications arise that many more banks were involved, it’s looking increasingly likely that the Barclays settlement is just the tip of the iceberg.

Between 2005 and 2009, staff at the bank repeatedly submitted false estimates of their interbank lending rates in an attempt to manipulate the London interbank offered rate (Libor) and the European interbank offered rate (Euribor).

Within an 18-month period, the UK regulator, the Financial Services Authority, found 111 requests by Barclays’ traders to submitters asking them to alter the bank's Libor submission in order to benefit their trading positions. Of these requests, a whopping 70 per cent were actioned.

The Libor and Euribor benchmarks are used for a wide range of purposes, including the pricing of complex financial instruments worth approximately $350 trillion worldwide. The benchmarks are also used to set interest rates for the general public, including loans and mortgages and the rates in savings accounts.

While it’s not yet clear if the bank succeeded in its bid to manipulate the rates, there have been indications that Barclays is just one of a number of high-profile investment banks involved. The implications of these two points are enormous.

Firstly, if Barclays is found to have succeeded in manipulating the rates, the bank could be forced to pay astronomical amounts in numerous lawsuits. The bank is already named in a number of class actions filed by those who held financial instruments that were linked to Libor and Euribor.

Secondly, the EU Commission is believed to be reviewing the case for evidence of collusion between banks. Those believed to be under investigation by the FSA in the UK and the Commodity Futures Trading Commission and Department of Justice in the US include Citigroup, RBS, and HSBC.

If nothing else, this case also serves to highlight once again the absolute arrogance of the banking sector and the abhorrently flawed culture of Barclays in particular.

In the past number of years, Barclays has gained a reputation as one of the most aggressive investment banks on the block. Before this latest controversy, the bank was most well known in financial circles for its ‘creative’ tax avoidance schemes. Such schemes eventually caught the attention of the UK Treasury, and in March 2012, Barclays was ordered to pay £500 million of lost tax.

In 2009, leaked documents showed that the bank was using a complex network of subsidiaries in tax havens including the Cayman Islands to reduce clients’ taxes. Chief executive Bob Diamond was hauled in front of a treasury committee in the UK and was forced to admit that the company had almost 300 subsidiaries in tax havens and that Barclays paid a paltry £113 million in corporation tax that year.

The bank has also been accused of violating international money-laundering laws, and previously settled a case with the US government for $US298 million for processing payments from sanctioned countries including Cuba and the Sudan.

These previous scandals show Barclays’ somewhat unique ability to bounce back from controversy. This time will be the real test for the bank. Shareholders are likely to accept nothing less than swift decisive action that shows the bank has moved on from this kind of ‘casino banking’. The easiest way to address this is lay the blame squarely with Diamond.

While Diamond has expressed his regret for what happened, the extent of the attempts show a dramatically skewed culture in the bank. Diamond needs to accept the blame for this culture.

In a somewhat misguided attempt to pacify his critics, Diamond has agreed to forfeit his bonus for 2012. This won’t wash with his critics. The culture in Barclays needs a radical overhaul, and it needs to be led by someone other than Diamond. "Bonus Bob” has completely lost the faith of the public in the wake of this latest scandal.

If confidence is to be restored in the bank, major changes need to be made. The first step is to show Diamond the door.