More banks in interest-rate rigging scandal

2012-07-21 08:42

A group of banks under investigation in London’s interest-rate rigging scandal are looking to pursue a group settlement with the regulators rather than face a Barclays-style backlash by going it alone, people familiar with the banks’ thinking said.

Such discussions are preliminary, and it is unclear if the regulators will enter these talks, aimed at resolving allegations that banks attempted to manipulate the London interbank offered rate, or Libor, a benchmark that underpins hundreds of trillions of US dollars in contracts.

Libor rates are set daily in London for a range of currencies and maturities.

Still, there are powerful incentives for the banks to enter joint negotiations.

Barclays was the first to settle with US and British regulators, paying a $453-million (about R3.7-billion) penalty and admitting to its role in a deal announced on June 27.

Its chief executive Bob Diamond quit the following week, bowing to pressure and erosion of the bank’s reputation.

The sources said that none of the banks involved now want to be second in line for fear that they will get similarly hostile treatment from politicians and the public.

Bank discussions about a group settlement initially took place before the Barclays agreement and picked back up in the aftermath.

It is unclear which banks are involved in the potential settlement talks. More than a dozen banks are being investigated in the scandal including Citigroup, HSBC, Deutsche Bank and JPMorgan Chase.

They all declined to comment.

A group agreement would appeal to the financial watchdogs because they would be able to announce a headline-grabbing figure, showing that they were dealing firmly with the banking industry’s misdemeanours, a banker said on condition of anonymity.

Earlier this year, five top US banks negotiated a $25-billion settlement with the government.

The justice ministry and other federal and state agencies were to resolve allegations of mortgage-services abuses.

The key regulators involved in the Libor case include the US Commodity Futures Trading Commission (CFTC) and Britain’s Financial Services Authority (FSA). The former was not available for comment, and the FSA declined to comment.

The main obstacle facing such a group settlement is a hesitancy on the part of the investment banks to work together in the fevered atmosphere surrounding the Libor investigations.

Negotiations and haggling could drag on for some time and a resolution was far from certain, the banker said.

The fact that each bank possibly had to settle with a different group of regulators, and that the charges were different in each case, also made the chances of success of such a settlement small, a source at one of the banks being probed said.

However, if they were able to reach a group settlement it would enable them to share the pain of negative publicity.

While Barclays received a 30% “discount” on the fines for cooperating fully with the authorities, it sustained far more serious damage with the subsequent loss of its top management and a public pillorying at the hands of politicians.

The spectre of severe penalties from regulators and the possibility of multibillion-dollar class-action suits has hung over more than a dozen banks being investigated worldwide since the extent of attempts to rig Libor became clear in CFTC and FSA documents released with the Barclays settlement.

Analysts have estimated that the scandal could cost the industry between $20 billion and $40 billion, further damaging a sector that is still struggling to work its way through the aftermath of the 2007-2009 financial crisis, economic downturns in Europe and the US, and increased regulatory demands.

Among the Barclays disclosures that sparked outrage were emails that showed employees asking for the submitted rates to be changed.

“Done . . . for you big boy,” read a message sent by a Barclays banker to one of the lender’s traders, who had asked him to fix Libor at an artificially low level.

A trader from another firm emailed a banker at Barclays, thanking him for the rate set artificially low: “Dude, I owe you big time! Come over one day after work and I’m opening a bottle of Bollinger.”

The unfolding scandal also has raised questions about what the regulators knew and what actions they took to rein in the activity.

Documents released by the US Fed show it was repeatedly warned about Libor manipulation.

Libor rates underpin an estimated $550 trillion in financial products, including consumer loans, mortgages, municipal bonds and corporate paper.

They are also considered a gauge of a bank’s health.

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