You’ve got to hand it to Lloyds Banking Group. The British lender could have been just the latest bank lambasted for Libor manipulation.
Yet the £218-million fine doled out by regulators on July 28 reveals a new twist. Lloyds effectively robbed the ambulance that saved it from certain death during the financial crisis.
Lloyds, formed from the shotgun marriage of Lloyds TSB and HBOS in autumn 2008, should be doubly grateful to UK authorities. It received £20-billion in new capital to stay afloat. Then, when wholesale markets froze, it borrowed £157-billion in emergency funding, mostly through a Bank of England program called the Special Liquidity Scheme.
For a fee, that let the bank swap mortgage-backed bonds, which were no longer trading, for British government debt, which could still be bought and sold even in the depths of the crisis.
But Lloyds’ traders weren’t grateful at all. Instead, they tried to fiddle the fee they were being charged. The SLS payment was set with reference to the spread between the three-month London Interbank Offered Rate and sterling repo rates. By submitting false rates for the latter, Lloyds cut the spread and hence the rate it paid. In the process, it deprived the BoE of £8-million pounds in industry fees.
The bank’s wrongdoing was not only, as the BoE says, “reprehensible.” Given the risks and rewards, it wasn’t even a smart trade.
The small number of repo traders responsible weren’t benefiting personally by their actions, and only saved the bank about £4-million. Their reward is a £70-million fine, on top of the £148-million in penalties for the more conventional sin of submitting false rates to fiddle the Libor benchmark.
Lloyds won’t suffer too much. Neither the current chairman nor chief executive was in place when the wrongdoing occurred. But the banking sector’s rehabilitation doesn’t just hinge on restoring investors’ trust. Lenders must also rebuild goodwill with politicians, regulators and the public.
This episode shows how far the amoral trader morality permeated even within retail banks.
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