Regulation and Compliance > Litigation

Barclays’ Diamond Blames Libor Fixing on Other Banks, Regulators

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Former CEO of embattled Barclays Bob Diamond sought to place the blame for Libor fixing on other banks and on regulators when he testified before the Treasury Select Committee, saying that Barclays was consistently at the high end of the reporting range and that he was “disappointed” regulators failed to act on Barclays’ advisements that other banks were manipulating their reports. Moody’s cut its outlook and threatened a downgrade, while investors in banks involved in the scandal could find themselves on the short end of the stick.

Bloomberg reported Thursday that when lawmakers asked Diamond why he took so long to discover that Barclays was manipulating its rate, he replied that Barclays was not the only one and that Barclays had reported higher rates than its brethren.

In his testimony, Diamond also referred to documents the bank released on Tuesday that said Paul Tucker, deputy governor of the Bank of England (BoE), had called Diamond to express Whitehall’s concern over the bank’s consistently high Libor rates. Senior officials in the government, Diamond cited Tucker as saying, were worried over the rates Barclays was reporting. The former CEO also said that Tucker told him the bank did not always need to report such high rates—something BoE has denied.

Diamond also said he had told Tucker that other banks could not be borrowing money at the rates they reported. He also expressed concern over the possibility of a government takeover of Barclays, and was quoted saying, “If Whitehall then was told Barclays was at the highest in Libor, they might say to themselves, ‘my goodness, they can’t fund; we need to nationalize them,’ as they had nationalized other British banks.”

Tucker has asked to give his own version of the conversation to officials “as soon as possible,” according to a statement issued by BoE, which said in part, “Mr. Tucker is keen to give evidence to the Committee in order to clarify the position with regard to the events involving the Bank of England, including the telephone conversation with Bob Diamond on 29 October 2008.”

Diamond also said he was not aware of the rate rigging till a week before regulators made their findings public. Yet he called officials’ attention to numerous warnings from the bank about other banks’ Libor rate reports, and that did not sit well with Parliament.

Scottish National Party lawmaker Stewart Hosie was quoted commenting, “I’m asking why people at Barclays noticed other people doing this, but were unable for whatever reason to recognize what was going on internally.”

Conservative committee member and former Barclays banker Andrea Leadsom challenged the bank’s compliance officers’ apparent ignorance of the rate fixing. “I want to focus on the criminality,” she said in the report. “Not the issues of the financial crisis but the actual criminal behavior. Clearly there was a significant amount of collusion going on.”

Officials in Parliament weren’t the only ones to find it peculiar that Diamond was supposedly unaware of what was going on. Michael Trippitt, an analyst at Oriel Securities Ltd. in London, said in the report that the notion that “some of these things only became clear to Bob” recently “struck me as odd.”

Although during his three hours of testimony Diamond tried to win over his audience, at one point saying to Tory Mark Garnier he was “just looking for a little love,” his efforts were met with derision and scorn.

Comments during Diamond’s testimony were harsh. Among other things, officials accused him of “living in a parallel universe” and of praising the bank’s culture as having saved it, when “it’s the culture that’s the problem.” They also quoted Diamond’s own past remarks back to him, with Pat McFadden of the Labour Party saying, “You have come to symbolize a culture that itself needs changing.”

John Mann of the Labour Party said his constituents looked upon Diamond as running a “rotten, thieving bank.” He also proposed to Diamond that he donate his annual bonuses to a charity for the homeless. “Either you were complicit in what was going on, or you were grossly negligent, or you were incompetent,” he said in the report.

Andrew Tyrie, Conservative chair of the committee, afterward described Diamond’s explanation of the scenario as “somewhat implausible” and was quoted saying, “Cumulatively, the whole thing looks a fairly sorry tale from the point of view of the culture of Barclays.”

Moody’s Investors Service said Thursday it may cut Barclay’s A2 credit rating, and cited increased uncertainty for the business in the wake of the departure of its three top executives. In its statement, it also said that it had cut its outlook on the bank from stable to negative.

Before Diamond’s testimony Wednesday, rogue trader Nick Leeson warned that officials might be sorry for grilling Diamond, saying in a Telegraph report, “Today’s proceeding … could potentially be very damaging for the country, if the complicity that is kind of being alleged at the moment with the FSA and the Bank of England is proven.”

Investors in Barclays saw the stock fall 16% the day after it was assessed regulatory fines of $451.4 million. But the bank has not given shareholders any indication of what they might expect in liability over the market manipulation. Other banks involved in the scandal are leaving their own shareholders uninformed in a similar manner.

Charles Peabody, a banking analyst at New York-based Portales Partners LLC, said in the report, “I believe that Barclays had previously reserved for only about one-third of their ultimate liability” in those fines. He added that the reserves of other banks involved in the scandal “will probably prove inadequate.”

Among the banks facing investigation over rigging Libor are Bank of America Corp., Citigroup Inc., Deutsche Bank AG, JP Morgan Chase, Royal Bank of Scotland Group Plc (RBS) and UBS AG. So far none of them has gone public with data on how much, if any, reserves are set aside to pay for possible liabilities.

“The automatic reaction from investors is: ‘Who’s next?’” said Todd Hagerman in the report. Hagerman, a New York-based analyst at Sterne Agee & Leach Inc. , added, “It’s fair to assume that legal and related professional fees and associated reserves are going to continue to remain elevated, if not increase.” He recommends caution regarding investments in the biggest U.S. banks.

Mike Mayo, an analyst at CLSA Ltd. in New York, warned investors in a note that “The two-year investigation into banks rigging Libor, which has taken a toll on Barclays, has the potential to hurt Citigroup, JPMorgan and Bank of America.”

Warning that the banks could be the targets of fines, lawsuits, negative news and new regulations, he added, “While there is no evidence that the three U.S. money- center banks did anything wrong, there is a heightened possibility of scrutiny after recent events at Barclays.”

While Barclays shareholders were advised that operating costs for the first quarter increased 4% to 2.14 billion pounds ($3.3 billion), which included an increase of 115 million pounds to provide for legal and regulatory costs, that could be just the beginning of added expenses for the bank, which is a defendant in numerous lawsuits already filed over the Libor issue—and that’s just in New York. Suits in London have yet to be filed, and shareholders have no idea how much that could amount to.

Robert Hickmott, an attorney with Los Angeles-based Quinn Emanuel Urquhart & Sullivan LLP, said in the report, “The global quantity of claims against Barclays as a result of it having manipulated Libor, it could stretch from the hundreds of millions into the billions.”

Then there’s the issue of criminal liability.

Peabody referred to all the involved banks when he said, “Specific disclosure on litigation reserves for any Libor suit settlements is completely lacking in any regulatory filings. My guess is that litigation reserves for civil suits from municipalities, class action suits, etc. are nonexistent.”

Anthony Maton, an attorney at Washington-based Hausfeld LLP, said that suits could be filed “by anyone stuck on the wrong side of these transactions.” Hausfeld represents claimants in the New York suits and is already working on a case to be filed in Britain later in the year. Maton clarified, adding, “Large corporate local authorities, other banks and financial institutions on the wrong side of the trades, pension funds, a very large variety of people that have been affected by this.”

Sanford C. Bernstein & Co. analysts said in a June 29 report, “This is a major regulatory issue for the Libor banks that will likely generate significant civil claims over the next four to five years. Investors should not minimize the importance of this matter.”