Barclays and LIBOR.

Last Wednesday (27/6/12) Britain's Barclays Bank agreed to pay a fine of USD93million to Britain's Financial Services Authority (FSA) and another fine of USD286million to the USA's Department of Justice (DoJ) for rigging the London Inter-Bank Offered Rate (LIBOR) of interest for Sterling, the Euro and the Yen. The deal with the FSA prevents Barclays British customers from suing the bank to recover any losses but the DoJ deal does leave the door open to litigation. Essentially Barclays have done three things wrong;

Firstly they've rigged LIBOR. This is the rate of interest that banks pay to borrow money from each other on the open market. Long term LIBOR trends along with other factors such as the Bank of England base rate eventually have an effect on the rate of interest you are paid on your bank savings and the rate of interest you pay on your mortgage/car loan. However LIBOR rigging has two much more immediate and significant effects. Large organisations like multi-national corporations, the NHS and local government bodies rarely keep the cash reserves they need to meet their day to day expenses such as their pay-roll. Instead they borrow the cash on a short-term basis (often over-night) and pay the LIBOR on those loans. So if the LIBOR is too high those organisations can't borrow the money they need to pay their workers and go bankrupt. Also there are literally thousands of LIBOR indexed derivative products on the market. These range from things like futures to those infamous credit default swaps. However they are basically just spread bets like you would place on a cricket match or a basketball game which use the LIBOR as the score. So if you guess the LIBOR correctly you make a fortune but if you guess wrong (even by one basis point - 0.01%) you lose a fortune. In 2011 LIBOR indexed derivatives were worth in the region of USD554trillion and combined with LIBOR indexed loans on any given day can be worth several times the value of the GDP of the entire planet.

The second thing Barclays were fined for is mis-selling fixed-rate LIBOR indexed loans and LIBOR indexed loan insurance to small and medium sized business that lack the wherewithal to cope with what are quite complex financial products. Basically this was the Payment Protection Insurance (PPI) scandal but for commercial rather then retail customers. Putting aside the significant mis-selling issue this is particularly bad because having sold lots of loans that are fixed to a high LIBOR level or offering insurance against LIBOR going above a certain level Barclays have then deliberately driven down the LIBOR making these products worse then useless. As many of these products include stiff penalty clauses that run into the hundreds of thousands of dollars they have forced many of these small and medium sized businesses either into bankruptcy or to the point of bankruptcy.

The big thing that Barclays haven't been fined for though is their role in the collapse of many British retail banks during the 2008 credit crunch. Although there were many causes for the crunch - primarily sub-prime loans going bad - what actually drove many of these banks including Northern Rock, Alliance & Leicester, Royal Bank of Scotland (RBS including Natwest and Ulster Bank), Lloyds-TSB and Halifax Bank of Scotland (HBOS) over the edge from crisis to catastrophe was the rising LIBOR which cut off their access to day to day funding. So by rigging the LIBOR Barclays appear to have played a central role in forcing most British banks to need government bailouts. This created a situation where really only two British high-street banks (HSBC & Santander) are now not wholly owned or partly owned by the British Government/State. This has significantly blurred the line between the private sector and state sector to the point where Britain is now more comparable to China or Mubarak-era Egypt then a free-market economy.

Quite apart from the epic fraud the Barclays scandal is particularly controversial because in intelligence circles Barclays has long been viewed as Britains dirty bank. That is to say Barclays goes and does the things that the British Government/State wants done but can't be seen doing. For example two of it's customers Huntington Life Sciences (HLS) who supply animals for vivisection and EDO MBM who make high-tech weapons systems/drones would both have been put out of business now by protest action if it wasn't for Barclays being prepared to back them at a loss. Also Barclays has been involved in helping the Iranian government circumvent US-led international sanctions in order to help increase British influence in the middle-east at the expense of the US and the European Union (EU). The close relationship between the British Government/State and Barclays has created a deep suspicion that Barclays LIBOR rigging was actually official British Government/State policy rather then the action of a few rouge traders. In response to this suspicion the British Government/State has tried to limit the scope of the scandal by setting up a narrow Parliamentary Inquiry rather then a wider Leveson-style Judicial Inquiry and seemingly hung Barclays out to dry by insisting that it's Chief Executive Bob Diamond and it's Chief Operating Officer Jerry del Missier resign and putting on a show of pulling Bob Diamond in for a grilling in front of a House of Commons Select Committee today (4/7/12). The reason for this approach is pretty obvious because if the world concludes that the LIBOR rigging is British rather then Barclays policy they will no longer want to do business with British banks and will certainly insist that LIBOR is no-longer used as an international benchmark.