Top Tories dragged into banking scandal

[Douglas Caddy]

We're powerless to get truth about bankers, says key MP

Diamond faces recall to Parliament – but Select Committee member says inquiry isn't working

By Andy McSmith, Oliver Wright

The Independent

Monday, 9 July 2012

Politicians have been virtually "useless" so far at getting to the truth behind the banking scandal, one of the MPs responsible for investigating the affair has admitted.

Andrea Leadsom, whose forensic questioning of the former chief executive of Barclays, Bob Diamond, led to his only uncomfortable moments during last week's cross-examination by the Commons Treasury Select Committee, said: "I don't think we felt we did a fantastic job. It's a fair criticism to say, 'You guys were useless'.

"We had great weaknesses in that we didn't have email trails. We didn't have recordings of the morning meetings where you could point to what had been said. All we really had were the regulators' reports, what we'd seen in the media."

Her frank remarks, in an interview with The Independent, will raise doubts about whether the larger parliamentary inquiry being set up to investigate the banking scandal will be able to uncover the whole truth. David Cameron has rejected Labour's calls for a judge-led inquiry, arguing that it would take too long. Several of the MPs who questioned Mr Diamond last week are now considering calling him back for a second bout because they are dissatisfied with his answers.

Paul Tucker, the Deputy Governor of the Bank of England, will be questioned by the same committee today about the now-infamous telephone call he had with Mr Diamond at the height of the banking crisis in 2008. Any clash between his evidence and Mr Diamond's will add to the pressure for the former Barclays head to be recalled.

One of the committee members, Pat McFadden, who was a business minister under Labour, said: "I can see that happening [Mr Diamond being recalled] after we have talked to other witnesses. There were some inconsistencies in what he told us. We'll ask Tucker if his version of the phone call tallies with Bob Diamond's."

Ms Leadsom complained that she found parts of Mr Diamond's evidence "simply unbelievable", while John Mann, another Labour member of the committee, said that he "may not have been entirely honest in his answers".

The Labour leader, Ed Miliband, will today promise to introduce major reforms of the banking industry in an attempt to improve competition and change its culture.

Tomorrow the Treasury Select Committee will ask the outgoing Barclays chairman, Marcus Agius, about the state of mind of executives who thought it was acceptable to rig interest rates. He can also expect to come under pressure not to allow Mr Diamond his full pay-off, reputed to be £17m. The Business Secretary, Vince Cable, told the BBC yesterday that the public would regard it as an "outrage".

The shadow Chancellor, Ed Balls, added: "It's outrageous that somebody should stand aside because the board decides that there's a problem and then get a payout which is sort of off the scale for anything normal people will earn in their lifetimes. How can that be?"

[Douglas Caddy]

July 9, 2012, 12:30 pm

British Official Defends Role of Central Bank in Barclays Rate-Setting Scandal

By MARK SCOTT

3:53 p.m. | Updated

The New York Times

LONDON - Under sharp questioning by political leaders on Monday, Paul Tucker, the deputy governor of the Bank of England, defended the central bank in light of the interest rate manipulation scandal that has engulfed Barclays.

Mr. Tucker rebutted allegations by Barclays' officials that the central bank was well aware of the manipulation of rates and did nothing to stop it.

Robert E. Diamond Jr., the former chief executive of Barclays, resigned because of the scandal and told the same committee last week that senior government officials had been repeatedly told about efforts to influence key interest rates but did nothing to intervene.

Mr. Tucker testified that while senior officials had maintained regular contact with senior managers at Barclays after the collapse of Lehman Brothers in 2008, he was not informed of the effort to manipulate the London interbank offered rate, or Libor. The rate is used as a benchmark for trillions of dollars of corporate loans, home mortgages and derivatives around the world.

"I was not aware of allegations of lawbreaking until the last few weeks," Mr. Tucker said during more than two hours of questioning.

Mr. Tucker, who is a front-runner to replace Mervyn A. King as the head of Britain's central bank next year, appeared confident in the initial part of his testimony, but became increasingly anxious as politicians queried him on his role in the scandal.

He added that the Bank of England had continued to use the rate to underpin its multibillion-dollar credit facilities for local banks throughout the financial crisis. The British government lent firms more than $310 billion as part of its so-called Special Liquidity Scheme from 2008 to 2011.

Despite the Bank of England's actions, British politicians criticized Mr. Tucker for not taking a more active role in policing. When asked by politicians whether he was confident that the Libor manipulation had now stopped, Mr. Tucker wavered.

"I can't be confident about anything after learning about this cesspit," he replied.

Barclays agreed in late June to pay about $450 million to settle accusations from United States and British authorities that its traders and senior executives had manipulated the rate.

Amid concerns that senior officials may have directed Barclays to alter its Libor submissions, British politicians on Monday focused their questioning on a conversation Mr. Tucker had with Mr. Diamond at the end of October 2008.

In his testimony, Mr. Tucker said the worries from authorities were linked to fears that the financial markets might perceive Barclays to be at risk if its Libor submissions continued to be higher than those of other international banks.

The British official said his phone call to Mr. Diamond was to remind the Barclays chief that people in the markets were questioning whether the British bank had access to financing.

"I wanted to make sure that Barclays' day-to-day funding issues didn't push it over the cliff," Mr. Tucker said.

E-mails released by the Bank of England before Mr. Tucker's testimony revealed that senior British officials were worried about banks' access to the financial markets in the aftermath of the collapse of Lehman Brothers.

"We are [very] concerned that U.S. rates are tumbling but we remain stuck," Jeremy Heywood, a senior British civil servant, told Mr. Tucker in an e-mail on Oct. 22, 2008.

Mr. Tucker also was in almost daily contact with senior Barclays executives during the final weeks of October, 2008, according to the documents.

"These were completely extraordinary times," Mr. Tucker said. "Two banks had been taken under the government's wing, so Barclays was next in line." During that period, the British government provided multibillion-dollar bailouts for Royal Bank of Scotland and Lloyds Banking Group.

He contacted Mr. Diamond on Oct. 25, 2008, saying he was "struck" that Barclays was paying a high interest rate on its loans, even though they were backed by British government guarantees. Mr. Tucker also asked to meet Mr. Diamond to discuss the financing issues.

A few days later, Mr. Diamond sent a separate e-mail to the Bank of England deputy governor with details of a 3 billion euro ($3.7 billion) bond that Barclays had issued, in an effort to quell officials' fears that the British bank was having financing problems.

"Investor confidence is slowly (very slowly) returning," Mr. Diamond wrote on Oct. 30, 2008.

The European Commission also waded into the fray on Monday after Michel Barnier, the financial services commissioner, said he would propose amendments to draft market abuse legislation that would outlaw the manipulation of Libor and other benchmark rates.

Mr. Tucker's testimony was seen as being pivotal to his future career path. Mr. Tucker, 54, has been with the Bank of England for more than 30 years.

After working briefly at the British bank Baring Brothers and with the Hong Kong government in the 1980s, Mr. Tucker rose inside the Bank of England to become the central bank's deputy governor in charge of financial stability in 2009.

He also is a leading figure in global efforts to overhaul financial regulation, holding senior positions at both the Financial Stability Board and the Global Economy Meeting, whose memberships comprise officials from the world's leading central banks.

Mr. Tucker is known for his practical knowledge of the financial markets as well as for a track record of backing extra support to finance British banks during the recent economic crisis, according to several of his current and former colleagues, who spoke on the condition of anonymity.

Yet the Libor scandal has hurt Mr. Tucker's reputation. Individuals connected to the Bank of England have voiced concerns that he missed signs that rate manipulation was happening.

In November 2007, for example, Mr. Tucker headed a committee meeting at the central bank in which, according to the meeting's minutes, some officials raised questions that banks were submitting lower Libor rates than what they could obtain from the market, a process called lowballing.

"This doesn't look good, Mr. Tucker," Andrew Tyrie, the chairman of the parliamentary committee, said. "In these minutes, we have what appear to any reasonable person as the lowballing of rates."

[Douglas Caddy]

http://www.dailymail.co.uk/news/article-2170941/Bank-England-deputy-governor-Paul-Tucker-I-didnt-tell-Bob-Diamond-rig-rates.html

[Douglas Caddy]

Federal Reserve Of New York Proposed Reforms For Libor Issues In 2007 To 2008

Reuters | Posted: 07/10/2012 6:59 am Updated: 07/10/2012 11:40 am

By Carrick Mollenkamp

July 10 (Reuters) - The Federal Reserve Bank of New York may have known as early as August 2007 that the setting of global benchmark interest rates was flawed. Following an inquiry with British banking group Barclays Plc in the spring of 2008, it shared proposals for reform of the system with British authorities.

The role of the Fed is likely to raise questions about whether it and other authorities took enough action to address concerns they had about the way Libor rates were set, or whether their struggle to keep the banking system afloat through the financial crisis meant the issue took a backseat.

A New York Fed spokesperson said in a statement that "in the context of our market monitoring following the onset of the financial crisis in late 2007, involving thousands of calls and emails with market participants over a period of many months, we received occasional anecdotal reports from Barclays of problems with Libor.

"In the spring of 2008, following the failure of Bear Stearns and shortly before the first media report on the subject, we made further inquiry of Barclays as to how Libor submissions were being conducted. We subsequently shared our analysis and suggestions for reform of Libor with the relevant authorities in the UK."

The Fed statement did not provide the precise timing of the communication with the British authorities. Bear Stearns collapsed in early March 2008 and was then acquired by JPMorgan.

Meanwhile, legislators on Capitol Hill have signaled they are interested in learning more about what Fed officials knew with regards to allegations of Libor manipulation.

On July 9, Rep. Randy Neugebauer, chairman of a subcommittee of the House Financial Services Committee, sent a letter to the New York Fed asking for transcripts of any "communications with Barclays regarding the setting of interbank offered rates from August 2007 to November 2008."

In the letter, a copy of which was reviewed by Reuters, the Texas Republican asked New York Fed President William Dudley to provide the transcripts by Friday.

Tim Johnson, who chairs the Senate Banking Committee, said on Tuesday he was concerned by the allegations of the potential "widespread manipulation" of Libor and had directed his staff to schedule briefings on the issue.

Johnson also said the committee planned to ask Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke about the allegations at hearings later this month.

Barclays last month agreed to pay $453 million to British and U.S. authorities to settle allegations that it manipulated Libor, a series of rates set daily by a group of international banks in London across various currencies.

The rates are an integral part of the world financial system and have an impact on borrowing costs for many people and companies as they are used to price some $550 trillion in loans, securities and derivatives.

By manipulating Libor, banks could have made profits or avoided losses by wagering on the direction of interest rates. During the enormous liquidity problems in the financial crisis they could, by reporting lower than actual borrowing costs, have signaled that they were in better financial health than they really were.

So far, the scandal has been more of a British affair, prompting the resignation of Barclays top three executives, condemnation from the British government amid a public outcry, and questions about the lack of oversight from British regulators.

The Bank of England's Deputy Governor Paul Tucker on Monday even had to deny suggestions that government ministers had pressured him to encourage banks to manipulate Libor.

But the deepening investigation by regulators in Britain, the United States, and other countries is expected to uncover problems well beyond Barclays and British banks.

More than a dozen banks are being investigated for their roles in setting Libor, including Citigroup, JPMorgan Chase & Co, Deutsche Bank, HSBC Holdings Plc , UBS and Royal Bank of Scotland..

JAWBONING

Regulators, including the New York Fed, had a responsibility "to force greater integrity and cooperation," and it had clearly reviewed the situation and had the resources to investigate, said Andrew Verstein, an associate research scholar at Yale University, who has written about Libor. "Obviously they considered this to be within their orbit."

Many of the requests for improper Libor submissions came from traders in New York.

As one of the world's most powerful regulators, the New York Fed has the power to "jawbone" banks to force them to make tough decisions, said Oliver Ireland, former associate general counsel at the Federal Reserve in Washington and now a lawyer at Washington law firm Morrison & Foerster.

Still, he said by the autumn of 2008, the New York Fed's focus was locked on the impact of the meltdown of Lehman Brothers and AIG as it sought to prevent a global economic disaster.

Barclays said in documents released last Tuesday that it first contacted Fed officials to discuss Libor on Aug. 28, 2007, at a time when credit problems arising from the U.S. housing bust were beginning to mount. It communicated with the Fed twice that day.

Between then and October 2008, it communicated another 10 times with the U.S. central bank about Libor submissions, including Libor-related problems during the financial crisis, according to the documents.

In its document listing those meetings as well as ones with British authorities, Barclays said: "We believe that this chronology shows clearly that our people repeatedly raised with regulators concerns arising from the impact of the credit crisis on LIBOR setting over an extended period."

As a bank doing business in the United States, Barclays U.S. operations would have come under the Fed's purview. This would have been even more the case after it acquired the investment banking and trading operations of the bankrupt Lehman Brothers in September 2008.

Officials with the New York Fed talked to authorities in Britain about problems with the calculation of Libor and also heard from market participants about whether an alternative could be found for Libor, people familiar with the situation said.

In early 2008, questions about whether Libor reflected banks' true borrowing costs became more public. The Bank for International Settlements published a paper raising the issue in March of that year, and an April 16 story in the Wall Street Journal cast doubts on whether banks were reporting accurate rates. Barclays said it met with Fed officials twice in March-April 2008 to discuss Libor.

"FIXING LIBOR"

According to the calendar of then New York Fed President, Timothy Geithner, who is now U.S. Treasury Secretary, it even held a "Fixing LIBOR" meeting between 2:30-3:00 pm on April 28, 2008. At least eight senior Fed staffers were invited.

It is unclear precisely what was discussed at this meeting or who attended. Among those invited, along with Geithner, was William Dudley, who was then head of the Markets Group at the New York Fed and who succeeded Geithner as its president in January 2009. Also invited was James McAndrews, a Fed economist who published a report three months later that questioned whether Libor was manipulated.

"A problem of focusing on the Libor is that the banks in the Libor panel are suspected to under-report the borrowing costs during the period of recent credit crunch," said that report in July 2008 that examined whether a government liquidity facility was helping ease pressure in the interbank lending market.

When asked for comment, McAndrews directed questions to a New York Fed spokeswoman. Dudley could not be immediately reached for comment.

To be sure, the Fed's reports have sometimes been inconclusive. One from last month - only shortly before the Barclays settlement was announced - found that "while misreporting by Libor-panel banks would cause Libor to deviate from other funding measures, our results do not indicate whether or not such misreporting may have occurred."

However, a 2010 draft of a related paper had said that banks appeared to be paying higher rates to borrow from other banks during the financial crisis compared with the levels they reported.

One step the New York Fed could have taken in 2008 when questions initially were raised was to find a way to get its staff embedded in the Libor calculation process, Yale's Verstein said.

There, they could use the Fedwire Funds Service - an electronic system through which banks settle interbank loans between one another - as a backstop to measure whether banks were accurately reporting borrowing costs. Then after the financial crisis had passed, regulators could have helped "urge on a newer and better system," he said.

The New York Fed was not part of the Barclays settlement, which was the first major resolution in the Libor probe.

The U.S. Commodity Futures Trading Commission, the U.S. Department of Justice, and the Financial Services Authority in Britain, settled with Barclays.

NO ULTIMATE RESPONSIBILITY

The scandal has thrown into sharp relief a potential regulatory gap: No single regulator appears to have had ultimate responsibility for making sure rates banks submitted were honest.

On Monday, the Bank of England's Tucker called the issue of banks improperly submitting rates a "cesspit."

In documents released with the Barclays settlement, the CFTC said Barclays traders on a New York derivatives desk asked another Barclays desk in London to manipulate Libor to benefit trading positions.

"For Monday we are very long 3m (three-month) cash here in NY and would like the setting to be set as low as possible," a New York trader emailed in 2006 to a person responsible for setting Barclays rates.

Darrell Duffie, a Stanford University finance professor who has followed the Libor issue for several years, said that he believed regulators were "on the case reasonably quickly" after questions were raised in 2008.

"It appears that some regulators, at least at the New York Fed, indeed knew there was a problem at that time. New York Fed staff have subsequently presented some very good research on the likely level of distortions in Libor reporting," Duffie said. "I am surprised, however, that the various regulators in the U.S. and UK took this long to identify and act on the misbehavior."

[Douglas Caddy]

FSA's Wheatley to examine wider market prices in wake of Libor scandal

A wide range of financial benchmarks are to be scrutinised in a government-backed investigation, after Bank of England policy-maker Paul Tucker warned the Libor rate-setting scandal could be repeated in other markets.

By Emma Rowley

6:01PM BST 10 Jul 2012

The Telegraph

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/9390336/FSAs-Wheatley-to-examine-wider-market-prices-in-wake-of-Libor-scandal.html

The Financial Services Authority's head of financial conduct Martin Wheatley is expected to examine many other “self-certified” market prices in his upcoming review investigating Libor.

Prices which, like Libor, are based on quotes or estimates from market players rather than actual trading, include foreign exchange rates, as well as prices for precious metals and - in part - benchmark prices for other commodities.

The Wheatley review was announced by the Chancellor last week, but its full remit has yet to be formally unveiled. Mr Wheatley is designated to become chief executive when part of the FSA is split into the Financial Conduct Authority.

Mr Tucker, the Bank of England's deputy governor, on Tuesday told MPs that Barclays’ abuse of the Libor system may be only one part of the banks’ dishonesty over crucial financial information, suggesting that other markets should now be investigated.

The official inquiry into Libor – which helps determine interest rates for householders and businesses – should be broadened to include several over markets where banks are trusted to report their own data, he said.

Barclays has been fined almost £300m for deliberately lying about the rates it was paying during the financial crisis, in order to downplay the financial pressure it was under. Other banks are also being investigated for distorting Libor, which is calculated on major banks’ own reports of their borrowing costs.

Mr Tucker said he could not be sure that abuse of the Libor system is not continuing to this day, telling the committee: “I can't be confident of anything after learning of this cesspit.”

The Libor scandal could be repeated in a number of other “self-certifying” markets where prices are determined, he added. “Self-certification is clearly open to abuse, so this could occur elsewhere,” he said.

Mr Wheatley's inquiry, due to conclude this summer, will examine whether Libor-setting should be regulated, what data it should use, and whether existing sanctions surrounding market abuse of Libor

[Douglas Caddy]

July 10, 2012, 9:28PM

Rate Scandal Stirs Scramble for Damages

The New York Times

By NATHANIEL POPPER

As unemployment climbed and tax revenue fell, the city of Baltimore laid off employees and cut services in the midst of the financial crisis. Its leaders now say the city’s troubles were aggravated by bankers’ manipulation of a key interest rate linked to hundreds of millions of dollars the city had borrowed.

Baltimore has been leading a battle in Manhattan federal court against the banks that determine the interest rate, the London interbank offered rate, or Libor, which serves as a benchmark for global borrowing and stands at the center of the latest banking scandal. Now cities, states and municipal agencies nationwide, including Massachusetts, Nassau County on Long Island, and California’s public pension system, are looking at whether they suffered similar losses and are weighing legal action.

Dozens of lawsuits filed by municipalities, pension funds and hedge funds have been consolidated into a few related cases against more than a dozen banks that are involved in setting Libor each day, including Bank of America, JPMorgan Chase, Deutsche Bank and Barclays. Last month, Barclays admitted to regulators that it tried to manipulate Libor before and during the financial crisis in 2008, and paid $450 million to settle the charges. It said other banks were doing the same, but none of them have been accused of wrongdoing.

Libor, a measure of how much banks must pay to borrow money from one another in the short term, is set through a daily poll of the banks.

The rate influences what consumers, businesses and investors pay on a wide range of financial contracts, as varied as mortgages and interest rate swaps. Barclays has said it and other banks understated the rate during the financial crisis to make themselves look healthier to the public, rather than to make more money from clients.

As regulators and lawmakers in Washington and Europe assess the depth of the Libor abuse and the failure to address it, economists and analysts are already predicting it could be one of the most expensive scandals to hit Wall Street since the financial crisis.

Governments and other investors may face many hurdles in proving damages. But Darrell Duffie, a professor of finance at Stanford, said he expected that their lawsuits alone could lead to the banks’ paying out tens of billions of dollars, echoing numbers from a recent report by analysts at Nomura Equity Research.

American municipalities have been among the first to claim losses from the supposed rate-rigging, because many of them borrow money through investment vehicles that directly derive their value from Libor. Peter Shapiro, who advises Baltimore and other cities on their use of these investments, said that “about 75 percent of major cities have contracts linked to this.”

If the banks submitted artificially low Libor rates during the financial crisis in 2008, as Barclays has admitted, it would have led cities and states to receive smaller payments from financial contracts they had entered with their banks, Mr. Shapiro said.

“Unambiguously, state and local government agencies lost money because of the manipulation of Libor,” said Mr. Shapiro, who is managing director of the Swap Financial Group and is not involved in any of the lawsuits. “The number is likely to be very, very big.”

The banks have declined to comment on the lawsuits, but their lawyers have asked for the cases to be dismissed in court filings, pointing to the many unusual factors that influenced Libor during the crisis.

The efforts to calculate potential losses are complicated by the fact that Libor is used to determine the cost of thousands of financial products around the globe each day. If Libor was artificially pushed down on a particular day, it would help people involved in some types of contracts and hurt people involved in others.

Securities lawyers say the lawsuits will not be easy to win because the investors will first have to prove that the banks successfully pushed down Libor for an extended period during the crisis, and then will have to demonstrate that it was down on the day when the bank calculated particular payments. In addition, investors may have to prove that the specific bank from which they were receiving their payment was involved in the manipulation. Before it even reaches the point of proving such subtleties, however, the banks could be compelled to settle the cases.

One of the major complaints was filed by several traders and hedge funds that entered into futures contracts that are traded through the Chicago Mercantile Exchange and that pay out based on Libor. These contracts were a popular way to protect against spikes in interest rates, but they would not have paid off as expected if Libor had been artificially lowered.

A 2010 study cited in the suit — conducted by professors at the University of California, Los Angeles and the University of Minnesota — indicated that Libor was significantly lower than it should have been throughout 2008 and was particularly skewed around the bankruptcy of Lehman Brothers.

A separate complaint filed in 2010 by the investment firm Charles Schwab asserts that some of its mutual funds, including popular ones like the Schwab Total Bond Market Fund, lost money on similar investments.

The complaints being voiced by municipalities are mostly related to their use of a popular financial contract known as an interest rate swap. States and cities generally enter into these swaps with specific banks so that they can borrow money in the bond market. They pay bondholders based on a floating interest rate — like an adjustable-rate mortgage — but end up paying their bankers a fixed rate through a swap. If Libor is artificially lowered, the municipality is stuck paying the same fixed rate, but it receives a smaller variable payment from its bank.

Even before the current controversy, some municipal activists have said that banks took advantage of the financial inexperience of municipal officials to sell them billions of dollars of interest rate swaps. Experts in municipal finance say that because of the particular way that cities and states borrow money, they are especially liable to lose out on their swaps if Libor drops.

Mr. Shapiro, who helps cities, states and companies negotiate these contracts, said that if a city had interest rate swaps on bonds worth $1 billion and Libor was artificially pushed down by 0.30 percent, which is what the lawsuits contend, that city would have lost $3 million a year. The lawsuit claims the manipulation occurred over three years. Barclays’ settlement with regulators did not specify how much the banks’ actions may have moved Libor.

In Nassau County, the comptroller, George Maragos, said in a statement that according to his own calculations, Libor manipulation may have cost the county $13 million on swaps related to $600 million of outstanding bonds.

A Massachusetts state official who spoke on the condition of anonymity because of potential future legal actions, said the state was calculating its potential losses.

“We are deeply concerned and we are carefully analyzing all of our options,” the official said.

Anne Simpson, a portfolio manager at the California Public Employees’ Retirement System — the nation’s largest pension fund — said that the fund’s officials “are sifting through the impact, but there certainly is an impact.”

In Baltimore, the city had Libor-based interest rate swaps on about $550 million of bonds, according to the city’s financial report from 2008, the central year discussed in the lawsuit. The city’s lawyers have declined to specify what they think Baltimore’s losses were.

The city solicitor, George Nilson, said that the rate manipulation claims meant that the city lost out on money when it needed it the most.

“The injury we suffered during the time we suffered it hurt more because we were challenged budgetarily,” Mr. Nilson said. “Every dollar we lost due to illegal conduct was a dollar we couldn’t pay to keep open recreation centers or to pay police officers.”

[Douglas Caddy]

July 10, 2012, 9:21 pm

Parliament Questions Culture at Barclays

The New York Times

By MARK SCOTT and BENJAMIN PROTESS

LONDON - During his tenure as Barclays chief executive, Robert E. Diamond Jr. spoke passionately about creating a strong culture of integrity and trust, a common philosophy that would breed success at the big British Bank. In a speech last year, he emphasized that the "evidence of culture is how people behave when no one is watching."

But now Mr. Diamond, who stepped down last week, faces criticism about his leadership as Barclays deals with fallout from a scandal involving interest rate manipulation.

On Tuesday, Barclays released new documents that indicate British regulators had raised questions about Mr. Diamond's management style, with concerns dating to his appointment to the top spot in late 2010. The scrutiny of Mr. Diamond came months - and in one case, years - before the bank came under fire for trying to manipulate key interest rates.

The revelations, during a tense parliamentary committee hearing in Britain, could put added pressure on the bank and Mr. Diamond.

"The culture at Barclays came from the top," said Andrew Tyrie, a member of Parliament who heads the committee. "It came from top executives."

In late June, Barclays agreed to pay $450 million to settle accusations by American and British authorities that it reported false rates in an effort to improve profits and make its financial position look stronger. The case, the first major action stemming from a global investigation into big banks, focuses on a key benchmark known as the London interbank offered rate, or Libor. Such rates are used to help determine the borrowing costs for credit cards, mortgages and other types of debt.

To help quell the anger over the case, Mr. Diamond agreed on Tuesday to forgo up to $31 million in stock bonuses that he was set to receive. Last week, the bank's chairman, Marcus Agius, said he also would resign, along with one of Mr. Diamond's top deputies, Jerry del Missier.

"I am sorry, angry and disappointed," Mr. Diamond told the parliamentary committee last week.

On Tuesday, British politicians directed their ire at Mr. Agius, who testified at the hearing for more than two hours. Lawmakers focused mainly on the actions of Mr. Diamond, wondering what went wrong inside the bank.

The committee, in part, addressed the newly released documents that show British regulators' earlier concerns about Mr. Diamond.

In a letter to Mr. Agius in late 2010, Hector Sants, the chief executive of Britain's Financial Services Authority, pushed for Mr. Diamond, who had been recently tapped as chief executive, to have an "increased level of engagement" with authorities. He added that regulators expected the incoming Barclays chief, who took over in early 2011, to have a "close, open and transparent relationship" with them.

Mr. Sants also cautioned about the incoming chief's chumminess with top Barclays deputies. Mr. Diamond helped build Barclays' investment bank into a global leader, and regulators wanted to ensure that he would exercise sufficient "clarity in oversight" over two close colleagues, Mr. del Missier and Rich Ricci, who replaced Mr. Diamond as the co-heads of the unit.

Questions about the bank's culture persisted.

In April, Adair Turner, chairman of the Financial Services Authority, wrote a letter to Mr. Agius, addressing what the regulator perceived as overly aggressive practices at the bank. He pointed to Barclays' efforts to avoid paying around $774 million in corporate taxes and some of the bank's accounting methods.

"Barclays often seems to be seeking to gain advantage through the use of complex structures, or through regulatory approaches which are at the aggressive end of interpretation of the relevant rules and regulations," Mr. Turner wrote.

In his testimony on Tuesday, Mr. Agius said that Mr. Turner's letter showed the bank's "strained" relationship with the Financial Services Authority. "What that letter is saying is that we overdid it," Mr. Agius said.

The correspondence between Barclays and British regulators appears to contradict evidence that Mr. Diamond gave last week to the same parliamentary committee.

In his testimony, Mr. Diamond indicated that the bank maintained a good relationship with the British regulator. He also said that he did not recall that the regulator had raised concerns about the bank's activities or its internal culture.

"I knew nothing about it at the time that I was appointed," Mr. Diamond told the parliamentary committee last week.

British politicians repeatedly asked Mr. Agius on Tuesday whether Mr. Diamond had been completely forthcoming during his testimony.

"Would you say that Mr. Diamond lied to this committee?" David Ruffley, a member of Parliament, asked Mr. Agius.

"I can't comment on Mr. Diamond's testimony," the Barclays chairman said.

In light of the concerns about Mr. Diamond's testimony, Mr. Diamond might be recalled to give further evidence next week. Senior officials from the Financial Services Authority also are expected to testify.

In his testimony, Mr. Agius gave more detail about the inner workings of the British bank. The Barclays chairman, who said he was first told about the investigations into the bank's Libor activities in April 2010, said the bank's board did not make decisions involving the setting of the Libor. Instead, issues related to the rate were left to lower-level executives, he told lawmakers.

When asked why senior managers did not question decisions to report artificially low rates, Mr. Agius said that the bank handled many difficult situations after the collapse of Lehman Brothers in 2008.

"I think it reflects the extraordinary times," he said.

At the beginning of his testimony, Mr. Agius said that Mr. Diamond would give up his deferred stock bonuses.

Still, Mr. Diamond will receive around $3.1 million, including one year's pay and a cash payment. The agreement is roughly double what he is contractually owed.

"We want to retain such good will as we can with him," Mr. Agius said.

Mr. Agius, who became Barclays' chairman in 2007, was asked to detail the circumstances of Mr. Diamond's resignation last week.

He told the committee that in early July he and Michael Rake, one of the bank's independent directors, talked to Mervyn A. King, the governor of the Bank of England, about the rate-manipulation scandal. During the conversation, Mr. King indicated that Mr. Diamond no longer had the support of the Financial Services Authority, according to Mr. Agius's testimony. But Mr. King said Barclays' board would have to make the final decision about Mr. Diamond's future.

After the conversation with Mr. King, Mr. Agius held a conference call with the bank's nonexecutive directors, who decided to ask Mr. Diamond to resign. After calling Mr. King to inform him of the board's decision, the chairman visited Mr. Diamond at his house.

"I left confident that he would resign," Mr. Agius said.

[Douglas Caddy]

Barclays chief Bob Diamond could be brought before Congress, sources say

Washington politicians considering asking former Barclays chief executive to testify as Libor-fixing

By Dominic Rushe in New York and Jill Treanor

guardian.co.uk,

Wednesday 11 July 2012 17.59 EDT

US politicians are considering summoning Barclays' former boss Bob Diamond to Washington to answer questions about the Libor-fixing scandal, in a sign that the controversy is becoming an ever hotter issue in the US.

Two high powered committees, the Senate banking committee and the House financial services committee, are both believed to be considering calling Diamond to testify. Sources close to both committees said they were in the early stages of gathering information and were almost certain to call the former Barclays chief executive after the summer recess.

Senator Tim Johnson, chairman of the banking committee, said on Tuesday that his panel would quiz Federal Reserve chairman Ben Bernanke and Treasury secretary Timothy Geithner on the scandal at hearings scheduled before the August break.

"I am concerned by the growing allegations of potential widespread manipulation of Libor and similar interbank rates by some financial firms," said Johnson.

A spokesman for the Senate banking committee would not confirm plans to call Diamond. He said: "No decisions have been made beyond plans already outlined." A spokesman for Diamond declined to comment.

The US justice department is already investigating the scandal, and several cities and state pension funds have launched legal action, claiming that their investments suffered as a result of the manipulation of Libor rates.

Barclays is the first high-profile settlement with regulators, and last month was fined £290m ($450m) by regulators in the UK and US over allegations that it attempted to manipulated Libor. But more than a dozen other banks including Citigroup, HSBC and JP Morgan Chase are being investigated for their roles in setting Libor rates.

White collar crime expert William Black, professor of economics and law at University of Missouri Kansas City, said US action would soon escalate the scandal. "We have very tough disclosure laws. We already seen how horrific these people's emails can be, there's going to be a lot more where that came from," he said.

In emails already disclosed, Barclays traders referred to Libor "fixings" and appear to have colluded in manipulating the exchange rate. "Dude. I owe you big time! Come over one day after work and I'm opening a bottle of Bollinger," wrote one trader after a colleague helped him out.

In the first signs of the reputational fall-out of the crisis, which has left Barclays searching for a new chief executive and chairman, Barclays was dropped from a bond issue for Japan Bank for International Cooperation, because of its involvement in the attempts to fix Libor.

Barclays refused to comment on its role in the bond issue, although City sources noted it had been active in other bond issues in recent days, including for other Japanese issues such as Sumitomo and NTT.

Wayne State University law professor Peter Henning said the scandal had the potential to become "the signature financial fraud of the meltdown." He said the trigger point was likely to come if and when a US bank is fined.

Henning pointed out that the Justice Department's fraud division was looking after the case, not the anti-trust division.

"They are looking at this as a fraud case. That's much more serious for any individual involved. Given the amounts of money we are discussing, there could be serious jail time if anyone is convicted," he said.

Henning said he expected the scandal to become an increasingly hot political topic. Analysts in the City are attempting to calculate the potential cost of any litigation. Cormac Leech, an analyst at Liberum Capital, calculated that bailed out Lloyds Banking Group could face a bill of £1.5bn – 7% of its stock market value – in the eventual fallout from the affair.

About 45% of US mortgages are tied to Libor rates, and cities including Baltimore are claiming they have had to cut essential services as a result of losing money on investments tied to Libor.

"They are never going to say this, but the Obama administration would like nothing more than to charge a big banker ahead of the election," said Henning.

John Coffee, a Columbia Law School professor, said the scandal was proving as damaging for regulators as bankers.

The fallout from the scandal is already hitting Obama's team. Geithner was president of the Federal Reserve bank of New York when the alleged manipulations took place and was aware of some of the issues. Geithner held a meeting on April 28 2008 titled "Fixing Libor" and communicated his concerns to the UK authorities but no further action appears to have been taken.He also regularly spoke to senior figures at Barclays, including Diamond.

"If the Federal Reserve knew that Libor was being manipulated and sat there and tolerated it, it suggests they were more interested in their relationships with the banks than with consumers," said Coffee.

"When Republicans are being hammered for being too close to big business, what could be better than pointing fingers at Geithner?" said Black.

[Douglas Caddy]

Libor: They all knew – and no one acted

Regulator’s claim it knew nothing thrown into doubt as documents show authorities were told of rate-rigging in 2008

BEN CHU

Saturday, 14 July 2012

The Independent

Regulators on both sides of the Atlantic failed to act on clear warnings that the Libor interest rate was being falsely reported by banks during the financial crisis, it emerged last night.

Click HERE to view 'The missed warnings how us authorities demanded changes... and were ignored' graphic

A cache of documents released yesterday by the New York Federal Reserve showed that US officials had evidence from April 2008 that Barclays was knowingly posting false reports about the rate at which it could borrow in order to assuage market concerns about its solvency.

An unnamed Barclays employee told a New York Fed analyst, Fabiola Ravazzolo, on 11 April 2008: "So we know that we're not posting, um, an honest Libor." He said Barclays started under-reporting Libor because graphs showing the relatively high rates at which the bank had to borrow attracted "unwanted attention" and the "share price went down".

The verbatim note of the call released by the Fed represents the starkest evidence yet that Libor-fiddling was discussed in high regulatory circles years before Barclays' recent £290m fine.

The New York Fed said that, immediately after the call, Ms Ravazzolo informed her superiors of the information, who then passed on her concerns to Tim Geithner, who was head of the New York Fed at the time. Mr Geithner investigated and drew up a six-point proposal for ensuring the integrity of Libor which he presented to the British Bankers Association, which is responsible for producing the Libor rate daily.

Mr Geithner, who is now US Treasury Secretary, also forwarded the six-point plan to the Governor of the Bank of England, Sir Mervyn King. The Bank pointed out last night that there was no evidence in the Geithner letter of banks actually making false submissions – although then note did allude to "incentives to misreport".

It was unclear last night whether Mr Geithner informed Sir Mervyn about the testimony of the Barclays employee who said that the bank was being dishonest in its submissions.

If it turned out that he did, that would be highly damaging for the Bank since it has always claimed that it never saw or heard any evidence that private banks were deliberately making false reports about their borrowing costs. Sir Mervyn is due to be questioned by the House of Commons Treasury Select Committee next Tuesday, where MPs are likely to put this question to the Governor.

The Bank's Deputy Governor, Paul Tucker, went before the Treasury committee last week to answer allegations that he had put pressure on Barclays to misreport its borrowing rates in 2008 while attempting to promote financial stability. Mr Tucker denied that he had done so and said he only found out that Barclays had been deliberately submitting dishonest Libor submissions recently.

The New York Fed released its cache of documents in response to a request from the chairman of Congress's Committee on Financial Services on Oversight and Investigation, Randy Neugebauer, who has been investigating how much US regulators knew about the rate-fixing scandal, in which 11 other banks around the world have been implicated.

A separate email released by the Bank of England yesterday shows that Mr Tucker forwarded the Geithner email to Angela Knight, the former chief executive of the British Bankers Association. She responded saying that "changes had been made to incorporate the views of the Fed".

While the BBA is understood to have acted on two of Mr Geithner's proposals, the other four were not adopted.

Before hearing from Sir Mervyn on Tuesday, the Treasury Select Committee is set to take evidence on Monday afternoon from Jerry del Missier, the former chief operating officer at Barclays, who gave the green light for traders to submit false Libor submissions during the crisis. He will be asked about whether he thought the order to do so had come down from the Bank of England.

Last month Barclays was fined £290m for rigging Libor between 2005 and 2008. The regulators found that Barclays traders had initially submitted false reports to make profits for its traders, but subsequently to allay concerns about the bank's health. Barclays' chief executive Bob Diamond resigned on 3 July. The Libor rate is used to fix the cost of borrowing on mortgages, loans and derivatives worth more than $450 trillion (£288 trillion) globally.

The missed warnings: ‘So we know that we’re not posting, um an honest Libor

One document released yesterday by the Fed detailed a conversation between staffer Fabiola Ravazzolo and an unnamed Barclays employee in April 2008, including the following edited extract:

Fabiola Ravazzolo: And, and why do you think that there is this, this discrepancy? Is it because banks maybe they are not reporting what they should or is it um…

Barclays employee: Well, let's, let's put it like this and I'm gonna be really frank and honest with you.

FR: No that's why I am asking you [laughter] you know, yeah [inaudible] [laughter]

BE: You know, you know we, we went through a period where we were putting in where we really thought we would be able to borrow cash in the interbank market and it was above where everyone else was publishing rates.

FR: Mm hmm.

BE: And the next thing we knew, there was um, an article in the Financial Times, charting our LIBOR contributions... and inferring that this meant that we had a problem... and um, our share price went down... So it's never supposed to be the prerogative of a, a money market dealer to affect their company share value.

FR: Okay.

BE: And so we just fit in with the rest of the crowd, if you like... So, we know that we're not posting um, an honest LIBOR. And yet and yet we are doing it, because, um, if we didn't do it it draws, um, unwanted attention on ourselves.

FR: Okay, I got you then.

BE: And at a time when the market is so um, gossipy... it was not a useful thing for us as an organization.

[Douglas Caddy]

July 14, 2012, 9:00 pm

U.S. Is Building Criminal Cases in Rate-Fixing

By BEN PROTESS and MARK SCOTT

The New York Times

As regulators ramp up their global investigation into the manipulation of interest rates, the Justice Department has identified potential criminal wrongdoing by big banks and individuals at the center of the scandal.

The department's criminal division is building cases against several financial institutions and their employees, including traders at Barclays, the British bank, according to government officials close to the case who spoke on the condition of anonymity because the investigation is continuing. The authorities expect to file charges against at least one bank later this year, one of the officials said.

The prospect of criminal cases is expected to rattle the banking world and provide a new impetus for financial institutions to settle with the authorities. The Justice Department investigation comes on top of private investor lawsuits and a sweeping regulatory inquiry led by the Commodity Futures Trading Commission. Collectively, the civil and criminal actions could cost the banking industry tens of billions of dollars.

Authorities around the globe are examining whether financial firms manipulated interest rates before and after the financial crisis to improve their profits and deflect scrutiny about their health. Investigators in Washington and London sent a warning shot to the industry last month, striking a $450 million settlement with Barclays in a rate-rigging case. The deal does not shield Barclays employees from criminal prosecution.

The multiyear investigation has ensnared more than 10 big banks in the United States and abroad. With the prospects of criminal action, several firms, including at least two European institutions, are scrambling to arrange deals, according to lawyers close to the case. In part, they are trying to avoid the public outcry that stemmed from the Barclays case, which prompted the resignation of top executives.

The criminal and civil investigations have focused on how banks set the London interbank offered rate, known as Libor. The benchmark, a measure of how much banks charge one another for loans, is used to determine the borrowing costs for trillions of dollars of financial products, including mortgages, credit cards and student loans. Cities, states and municipal agencies also are examining whether they suffered losses from the rate manipulation, and some have filed suits.

With civil actions, regulators can impose fines and force banks to overhaul their internal controls. But the Justice Department would wield an even more potent threat by bringing criminal fraud cases against traders and other employees. If found guilty, they could face jail time.

The criminal investigations come at a time when the public is still simmering over the dearth of prosecutions of prominent executives involved in the mortgage crisis. The continued trouble in the financial sector, including the multibillion-dollar trading losses at JPMorgan Chase, have only further fueled the anger of consumers and investors.

But the Libor case presents a potential opportunity for prosecutors. Given the scope of the problems and the number of institutions involved, the rate-rigging investigation could provide a signature moment to hold big banks accountable for their activities during the financial crisis.

"It's hard to imagine a bigger case than Libor," said one of the government officials involved in the case.

The Justice Department has jurisdiction over the London bank rate because the benchmark affects markets in the United States. It could not be learned which institutions the criminal division is chasing next.

According to people briefed on the matter, the Swiss bank UBS is among the next targets for regulatory action. The Commodity Futures Trading Commission is pursuing a potential civil case against the bank. Regulators at the agency have not yet decided to file an action against the bank, nor have settlement talks begun. UBS has already reached an immunity deal with one division of the Justice Department, which could protect the bank from criminal prosecution if certain conditions are met. The bank declined to comment.

The investigation into the global banks is unusually complex and it could continue for years, and ultimately end in settlements rather than indictments, said the officials close to the case. For now, regulators are building investigations piecemeal because the facts of the cases vary widely. That could make it difficult to compile a global settlement, although some banks would prefer an industrywide deal to avoid the harsh glare of the spotlight, said a lawyer involved in the case.

American authorities face another complication as they build cases. Investigators still lack access to certain documents from big banks.

Before gathering some e-mail and bank records from overseas firms, the Justice Department and American regulators need approval from British authorities, according to the people close to the case. But officials in London have been slow to act, the people said. At times, British authorities have hesitated to investigate.

By contrast, the Justice Department and the Commodity Futures Trading Commission have spent two years building cases together. Lanny Breuer, head of the Justice department's criminal division, has close ties with David Meister, the former federal prosecutor who runs the commission's enforcement team.

In the Barclays case, the British bank was accused of reporting false rates to squeeze out extra trading profits and fend off concerns about its health. During the crisis, banks feared that reporting high rates would suggest a weak financial position.

Lawmakers in London and Washington are examining whether regulators looked the other way as banks artificially depressed the rates. On Friday, it was disclosed that a Barclays employee notified the Federal Reserve Bank of New York in April 2008 that the firm was underestimating its borrowing costs. Despite the warning signs, the illegal actions continued for another year.

But in April 2008, a senior enforcement official at the Commodity Futures Trading Commission, Vincent McGonagle, opened an investigation. He directed the case along with another longtime official, Gretchen Lowe.

At first the case stalled as the agency waited months to receive millions of pages of documents when Barclays pushed back against the American regulators, according to the officials close to the case. By the fall of 2009, the trading commission received a trove of information, providing a broad view into the wrongdoing.

A series of incriminating e-mail and instant messages, regulators say, laid bare the multiyear scheme. In one document, a Barclays employee said the bank was "being dishonest by definition."

The case gained further traction in early 2010, when the agency's enforcement team engaged the Justice Department. The department's criminal division, led by Mr. Breuer, agreed that regulators had a strong case. The investigation continued until January 2012, when the trading commission notified Barclays lawyers that they were entering the final stages before deciding about an enforcement action.

As part of the deal, regulators pushed the bank to adopt new controls to prevent a repeat of the problems. Among other measures, the bank must now "implement firewalls" to prevent traders from improperly talking with employees who report rates.

The bank says that it provided extensive cooperation during the three inquiries, and has spent around $155 million on its own three-year investigation. Because it agreed to settle with British authorities, Barclays received a 30 percent fine reduction.

In the United States, Barclays offered to pay a fine of $200 million to the C.F.T.C., slightly below the initially proposed range, according to government officials close to the case. Mr. Meister's team soon accepted the offer, securing the biggest fine in the commission's history.

On June 27, British and American authorities announced the deal with Barclays, which agreed to pay more than $450 million total. "For this illegal conduct, Barclays is paying a significant price," Mr. Breuer said then.