Sunday, 15 July 2012

2319 Barclays Bank and the Scandal (2)

In this first piece on Barclays and the Interbank over night lending and borrowing rate scandal and the role its chairman, its Group Chief Executive Officer, the Regulators in the UK and in the USA and of National Politicians and Whitehall I concentrate on Barclay’s Bank as an Institution and on what I have learned about L.I.B.O.R from the detailed note prepared for Members of Parliament by Timothy Edmonds of the House of Commons Library team concerned with Business and Transport.

Barclay’s Bank according to Wikipedia is the 22nd biggest wealthiest British based World Wide Corporation with a primary listing on the London Stock Exchange. It has over 145000 staff in 50 countries with assets of one and half trillion pounds, a Share Equity of over £50 billion and a revenue income of over £30 billion. That such a world wide corporation and one the Biggest High Street and Investment Banks in the world should be found guilty of behaviour which was reprehensible and according to the USA regulators unlawful is potential damaging not just to London’s reputation as one of the leading banking and finance centres in the world but to the future of the British economy and to our future political and social stability.

That the Chairman of Barclay’s bank, who incidentally also became Chairman of the British Banker’s Association while the investigation gained apace, and the Group’s Chief Executive Officer who I shall affectionately call Casino Bob because of his liking to call even his inquisitors who he had not previously met by their Christian names, did not appreciate that they would have to resign at the same time as the full extent of the wrong doing was made public, and consequently took steps to plan for a quick and smooth succession, demonstrates why both had to go and further that consideration should be given to excluding them in the future from positions of authority, trust and responsibility in the banking and financial sectors which have any impact on the British economy and the lives of fellow citizens.

Whatever misgivings the British establishment had about going as far as saying this before respective appearances before the House of Commons Treasury Committee the otherwise fracturing  political parties are all united in their condemnation as I shall subsequently report.

It was indeed a member of the Treasury Committee, John Mann who asked Casino Bob if he knew what the principles on which the founders of the bank had set and to which Casino Bob said he did not, so he was told they were honesty, integrity and plain dealing.

The bank commenced to function as early as 1690 but it was not until the 1980’s that the present world wide body took shape and where Casino Bob joined in 1996 and Chairman Marcus Agius joined the Board in 2006 with a view to take over from the retiring Chairman in in January 2007. 

The bank had been the first to establish the debit card in the UK in 1987 having earlier in the decade acquired the American Credit Corporation. In 2008 the bank acquired the assets of the collapsed Lehman Brothers bank in the USA.

The bank continued to have an active involvement in South African funding during the Boer dictatorship and the Apartheid years and continues to fund the Mugabe regime in Zimbabwe. It provided funds for the land reforms which saw 100000 black workers driven from their homes. The bank hold accounts from associates ignoring EEC sanctions. The bank is also accused of money laundering including an involvement with others in by passing US laws banning transactions involving Iran

The bank was also one of three banks where the Labour Government proposed to take into part state ownership by injecting billions of capital, but which resisted by raising capital in the market place, loans from private investors and cancellation of the share dividend. I understand that a major investor in the present bank is the Qatar state who as part of their involvement made it plain that they did not want UK Government direct involvement which is said to have created a major problem when there was said to be need for further capital and the British Government has indicated a willingness to become involved. It was reported that the bank has obtained several billions of dollars from AIG including some £5 billion of US government bail out funds which is an interesting way of getting over the non government direct involvement hurdle.

In 2010 Barclays achieved a different kind of first ranking as the UK based bank with the most customer complaints with over 250000 new customer complaints in the second half of 2010 yet it is only the third size bank in the UK in terms of the number of branches.

The bank is however in a good position to achieve the separation between the High Street and small business side of operations and the Corporate and Investment interests proposed under the new financial legislation before Parliament. Overall it has some 25 divisions of which Barclaycard Credit is perhaps the most well known along I suspect with its sponsorship of the Premier League in English and Welsh football. Its corporate operations cover 8000 companies’ world wide with annual turnovers of more than £5 million and the bank has 550 High Street branches in Spain of its 4750 in total around the world.

Interestingly I have read comment that of the non executive Directors who form the Board, that the majority come from Capital and Investment banking rather than the High Street Retail and small business support ventures. Sir Michael Rake is the senior Independent Director and some believe will take over as the  next Chairman when Marcus Agius finally goes. The day to day management of Barclay’s is through the Executive Committee of Executive Directors under Chairman Marcus who include the Group Finance Director Chris Lucas, the present head of Corporate, Mark Harding the Groups General Counsel, and Investment Banking Rich Ricci (I kid you not) Robert Le Blanc The Chief Risk Officer and Sally Bott responsible for the Groups Human Resources, Brand and Marketing and who reported direct to Casino Bob.

Given the recent attack by Cameron and Osborne on the tax avoidance measure of a British Comedian it is surprising and revealing that the these deadly comical politicians did not also remind that Barclays was recently forced to pay back half a billion of the alleged billion of successful tax avoidance measures it had achieved by a complex system of using Cayman Island companies, US partnerships and Luxembourg subsidiaries. After the division headed by Casino Bob had to write off debts of 1.65 billion pounds written off because of the US sub prime disaster, Casino Bob was given £14.8 million bonus out of a profit of £2.3 billion.

So why has the latest  concerns created such a furore and led to resignations and calls for a Leveson type Inquiry as well as the extraordinary scenes at the Commons Treasury when Chairman Marcus was attacked and Casino Bob vilified like no other witness that I can recall seeing or  knowing of?

From the Mark Thompson Paper I first learned the details of LIBOR as the notional rate at which banks lend money to each other on the overnight market. The note explains that each day the banks in effect do a debt credit balance as a result of their activities and decide if they are in a position to lend money or need borrow to balance the books.

I discovered that there is not rate but rates related to each currency with 15 banks involved in the setting of the Euro rate, 16 for Stirling and 18 for the Dollar. The rate is set by designated officers in each of the participating banks every trading day between 11 and 11 10 am and notified on a programmed computer submitted to Thomson Reuters who manage the rate setting on behalf of a separately managed company owned by the British Banker’s Association of which the Chairman of Barclays also became its chair.

The ability to manipulate the rate from one bank alone is further limited as not only should each bank making a submission do so without consulting other banks although once the rate has been set the information provided is published but there is a trimming process, so say for Sterling with Barclays one of 16 submitting an individual rate, if it is one of the highest or four lowest it is excluded and the average of the middle eight is only used to determine the rate for the next 24 hours

I remain confused as to how each bank decides on their rate submission but my understanding is that the rate should be put forward by each bank based on their credit or debt balance at the end of the previous trading day having then borrowed or lent money overnight as the rate set that morning. It is also important to understand that we are talking about fine margins in the percentage rate with say a fix a 2% a year the actual overnight borrowing or lending rate is this divided by 365.

Moreover the reason why it was not closely monitored from a regulatory perspective as it is now evident it should have been or had criminal sanctions for wrong doing applied, is because it  was comparatively stable without significant variations. It was only with the international banking crisis that this position changed and the published graphs demonstrate how the rate submitted by Barclays significant varied and I also believe proves that there is a correlation between this variation and hundreds of proved attempts by traders to influence the rate to the advantage of the bank and ultimate to their personal financial advantage.

In his evidence and in some news media reporting the attempting impression was given by the former group Chief Executive explained that a small clique of some 14 traders working together within the Casino arm of the bank and with other banks altered or attempted to alter the rate, 14 out of  some 2000 traders  and 140000 employees world wide.

Between 2008 they were acting for themselves openly shouting out their wishes to the bank’s submitting or sending congratulatory emails to each other and working in a clear and strict structure accountable to directly to Mr Diamond in which any and all decisions which varied from agreed parameters had to be escalated upwards for confirmation or decision or face instant dismissal.

It remains a world of trillion dollars, pounds and euro trading. The briefing note reveals Barclays engaged in $455 trillion worth of contracts notionally in 2009 and over $500 trillion at the end of 2011 So while the influence is at the margin and involved a minority the impact is substantial and is while civil actions are being prepared in the USA and the UK.

But this was not just a few trader acting independently of senior management for a USA Regulatory states in its published report  “The  American Commodity Futures Trading Commission also finds that Barclays, acting at the direction of senior management engaged in other serious unlawful conduct concerning LIBOR. “

“In late 2007 Barclays was the subject of negative press reports raising questions such as, “So what the hell is happening at Barclays and Its Barclays Capital securities unit that is prompting its peers to change it premium interest in the money market?” Such negative media speculation caused significant concern within Barclays Bank. As a result, certain senior managers within Barclays instructed the US Dollar Libor submitters and their supervisors to lower Barclay’s Libor submissions to be closer to the rates submitted by other banks and not so high as to attract media attention“

It is therefore important to underline that the USA regulator states the traders were acting under the direction of senior management for a time.  These managers should have reported upwards all the way to Casino Bob and he in turn to the Executive Committee and Chairman Marcus. The Risk Director, the Chief Financial officer, the Group counsel and the Human resources Director should all have been informed.

In its published findings after the several years of investigation by the UK Financial Services Authority highlighted that between 2005 and 2008 Barclays acted inappropriately in relation to their Euro and Dollar submissions motivated by profit and to benefit the bank’s tradition positions. Barclays further breached the code of practice on numerous occasions between 2006 and 2007 attempting to influence the submissions of other banks in relation to the Euro and to a lesser extent the dollar rates. The behaviour led to Barclays being able to profit from this misconduct and when Barclays acted in concert with other banks the risk of manipulation increased materially.

“Senior managers at Barclays even coined the phrase “head above the parapet to describe high Libor submissions relative to other banks.” This senior management directive was made to fend off the negative comment although Barclays was convinced that that the submissions of other banks were being set too low given the market conditions.

There are two aspects of these published findings of great noteworthiness. The first is the language of the British FSA and I will come to this again later as to my mind it suggests an attempt to play down the criminality of the action, legitimate I suppose, because the FSA did not possess powers to brand the behaviour as unlawful and therefore prosecute individuals as potential criminals. Language which the USA regulator does not hesitate to use. Indeed I have seen an article in the New York Times saying that there is a move to extradite some of the rogue traders to face criminal charges in the USA

The second is the implication of a conspiracy involving other banks and which is yet to emerge and this aspect continues under investigation although I understand the report on the involvement of the Royal Bank of Scotland is ready for publication together with negotiations on the financial penalties and would have become available had not the furore over Barclays exploded. I assume it will be now held over until Olympic good news or until Parliament reassembles from its long summer vacation. If our situation is so serious then I do not understand why the Parliamentary holiday, and that of the Civil servants and those needing to submit documents and be questioned should not postpone holidays.

The note provided for Members of Parliament also makes it clear that there were two levels of wrong doing with the first occurring over many years during which the highly paid and bonuses seeking traders involved committed acts for direct personal gain and which are now being investigated by the Serious Fraud Squad here in the UK and who had now a different head after years of failures to bring successful prosecutions. I will refer to the Party political reaction to the question of criminal prosecutions separately but the evidence to me is that the cosy nature of the relationship between the Bankers and the Regulatory authorities was such that they used the absence of  specific  legislation  declaring the behaviour could result in criminal prosecution  not to do so. They could have then as now referred the matter to the Serious Fraud Squad to investigate the potential criminal acts of individuals and also the question of conspiracy. I am reminded of what emerged  during the Leveson Inquiry, Moreover was Whitehall, including Political Government kept informed of the inquiry progress and proposed outcomes and if not why not, and if it was,  was an opinion on criminal prosecutions suggested or the subject of informal exchanging of viewpoints?

The Parliamentary briefing note lists a number of high profile fines imposed by the FSA over the past 12 months with HOB £10.5 million for mis-selling products to Elderly customers. Coutts and Company have been fined twice for £8.75m and £6.04 m and RBS £3.5m for complaint handling failures and £17m compensation for customers. One Hedge fund CEO was fined £3m and banned from having a role in Financial services and about £20 million worth of other fines was shared by 5 others. None of these led to criminal prosecutions.

There is some uncertainty over how much Barclays has been fined here and in the USA although most reports suggest that the total amount is of the order of £200 million and that Barclays has also spent another £100 million on fees to conduct its own investigation as well as trying to ensure that the malpractice was limited to this market rate and not others.

I will next turn to the roles of Chairman Marcus and Casino Bob

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