LIBOR scandal may plunge global banking industry into chaos

LONDON: A scandal over the rigging of key interest rates could plunge the global banking industry into a legal morass for years, analysts said, as the head of Barclays fought to hold onto his job.
With the Times newspaper naming RBS as the next bank facing a fine for its alleged involvement in manipulating the key lending rate between banks, the head of the Bank of England said there needed to be "real change" in the industry's culture.
Referring to what he called the "deceitful manipulation" of rates, Mervyn King told a news conference yesterday the London Interbank Offer Rate (LIBOR) should be reformed to reflect actual market transactions.
US and British authorities fined Barclays $453 million on Wednesday for manipulating LIBOR, which underpins some $360 trillion of loans and financial contracts around the world — and analysts forecast more banks would soon be named for collusion.
"Reading the statements by the authorities we expect to get settlements by others in the course of time which could be more punitive," analysts at Credit Suisse said.
Others predicted Barclays and other banks could face billions in costs from litigation, especially in the United States, in much the same way that oil major BP ran into drawn-out legal rows over its oil spill.
"Given the long-tailed nature of investigations we expect this to be a long-term overhang," said Morgan Stanley analyst Chris Manners.
Barclays was the first bank to settle in an investigation which is looking at other large financial institutions in Europe, Japan and North America, including Citigroup, HSBC and UBS. No criminal charges have been filed.
The Times said RBS faced a likely fine of 150 million pounds ($233 million) for participating in market manipulation offenses similar to those engaged in by Barclays. The bank said no fine or settlement had been decided upon.
The heaviest pressure remained on Barclays chief Bob Diamond, who was running the investment banking arm Barclays Capital when the rigging occurred in 2005-2009, despite his vow not to quit.
Britain's popular tabloid newspaper The Sun tore into the banker, calling him "Bob the Rob" and saying: "Never in the past four miserable years have bankers been more hated than now."
Prime Minister David Cameron said Diamond would appear before parliament's Treasury Select Committee, adding, "He and his management team have serious questions to answer."
"People are rightly angry about the behavior of the banks and so am I," Cameron told a news conference in Brussels.
Britain has also called in the fraud squad to investigate possible crimes.
"Politicians have already been baying for blood and calling for the head of Bob Diamond," said Stephen Peak, manager of the Henderson UK Alpha and European Absolute Return funds and a shareholder in the bank.
"We feel that the Barclays board will instinctively wish to resist this, as Diamond is clearly the architect and leading light of Barclays, but feel that the pressure may be too great."
Diamond told Morgan Stanley analysts on Thursday he did not intend to stand down and sources close to the bank said Barclays' shareholders were satisfied with the bank's decision to come clean and settle.
One fund manager at a top 100 Barclays shareholder said he did not think senior management was to blame for the scandal.
"Realistically, how is the guy sitting several layers above going to have any knowledge of that, unless they were explicitly encouraging it — which they don't appear to have done in this instance."
However, he added, neither Barclays or RBS had acted quickly enough to tell shareholders what was happening.
"No-one has come to us to try and explain anything. Barclays have settled early, so they can no longer claim uncertainty of outcomes in the same way but investors are still subject to reasonable uncertainty as to how much this might cost them in the end."
The father of one Barclays customer described the bank's behavior as "toxic and disgraceful" and said he would close down his child's account.
"To learn of this scandal where they are fixing LIBOR to benefit themselves... I just cannot believe that behavior," said Lynne Brooke, a Hampshire-based solicitor.
Authorities investigating the LIBOR scandal are looking at banks in Europe, North America and Japan.
In response to the Times report RBS said it continued to co-operate with regulators on the ongoing investigation, adding any resolution of its case was months away.
"The process is not as far advanced as the (Times) article suggests and there can be no certainty as to the timing or amount of any fine or settlement at this point," the bank, which is part-nationalized, said in a statement.
Like Diamond, RBS Chief Executive Stephen Hester will waive his bonus this year, a source close to the lender said, but the gesture has been presented as an apology for the recent computer systems failure which caused disruption to millions of customers, and unrelated to the LIBOR probe.
The Barclays rate-fixing affair, which disclosed e-mails in which bankers appeared to promise bottles of champagne to each other for help in setting the rates, has fueled anger from taxpayers struggling with austerity measures who are now closely watching the banks they bailed out during the financial crisis.
Adding to their ire, the Financial Services Authority said yesterday it had found "serious failings" in the way specialist insurance had been sold by Barclays, RBS, HSBC and Lloyds, concluding they mis-sold products.
Compensation could run into the hundreds of millions of pounds, lawyers have said, although Lloyds and Barclays said the cost for it would not be material.
The FSA said from 2001 to date, banks sold around 28,000 interest rate protection products to customers.
"Such products took advantage of small businesses, many of which could not reasonably have been expected to understand what they were signing up to, at a time when loans were difficult to come by. This is completely unacceptable," said Andrew Tyrie, head of parliament's Treasury Select Committee.
A string of mis-selling cases has damaged the financial services industry for over two decades. Banks are already committed to paying upward of 9 billion pounds ($14 billion) to customers in compensation for mis-selling loan insurance.
Barclays shares closed down 1.7 percent, the weakest major European bank. The EU bank index rallied 4 percent after Euro zone leaders agreed emergency action to cut Spain's and Italy's borrowing costs.