A rate-fixing scandal engulfing one of Britain's largest banks has forced out its CEO and another executive who was one of the highest-ranking Canadians in global finance, leaving another black eye on a sector whose reputation has yet to recover from the 2008 crisis.
Less than a week after Barclays Bank PLC admitted that its staff helped manipulate benchmark interest rates to boost profits and make the bank appear financially healthier than it was, chief executive officer Robert Diamond resigned amid pressure from the U.K. government and regulators. Jerry del Missier, a Canadian who rose quickly in London and was recently named Barclays' chief operating officer, followed hours later.
The resignations were seen as an admission by Barclays that the problems ran deeper than the bank acknowledged last week when it paid $453-million worth of fines to settle allegations that its traders manipulated the benchmark interest rate Libor, which stands for the London interbank offered rate.
Libor is one of several key rates used in the financial world to determine the cost of more than $350-trillion worth of financial products, ranging from mortgages and credit cards to bonds and corporate loans.
About 20 of the world's largest banks submit information about their borrowing costs, which helps determine the ultimate rate.
Pushing the figure up or down can have an effect on borrowing costs, and just one basis point (or 0.01 per cent) could mean "a couple of million dollars' in profit for traders, according to damning internal e-mails made public in the settlement.
"Dude, I owe you big time!" a grateful banker wrote to a Barclays employee who agreed to alter the bank's Libor submission.
"Come over one day after work and I'm opening a bottle of Bollinger."
But the global banking sector now faces a bigger problem than employees at one London bank trading favours. Barclays is just one of nearly 20 banks – including Royal Bank of Canada – involved in the investigation after Swiss bank UBS revealed the probe last year, telling its shareholders it had settled in exchange for immunity from criminal persecution.
In a statement made public on Tuesday, Barclays called it "ironic that there has been such an intense focus on Barclays alone," which it said was "caused by our being first to settle in the midst of an industry-wide, global investigation."
Little is known about how far the problems have spread. In addition to Barclays, the other banks asked to provide information are RBC, Bank of America, Barclays, Citibank, Credit Suisse, Deutsche Bank, HSBC, JPMorgan Chase, Lloyds, Rabobank, Bank of Tokyo-Mitsubishi, Norinchukin Bank, Royal Bank of Scotland, and West LB.
RBC has declined to give an update on its involvement in the probe. "It's our understanding that all the nearly 20 banks responsible for setting LIBOR have been asked for information," a spokeswoman for RBC said on Tuesday. "We continue to cooperate with regulators in their requests for information."
After existing in near secrecy for the past two years, the investigation is clearly gathering speed. When Barclays agreed to pay the massive fine to regulators last week, a series of e-mail and telephone transcripts between traders were made public, showing how they helped push up the benchmark rate before the 2008 financial crisis by reporting higher borrowing costs.
But documents made public Tuesday also showed the bank attempted to manipulate rates in the other direction during the crisis. In an effort to quell speculation and rumours about its stability, Barclays reported artificially low borrowing costs in the Libor process, hoping to signal that its operations were sound, since higher borrowing costs are a sign of problems.
During a 2008 phone call with an official from the Bank of England, Mr. Diamond was asked why of the 16 or more banks who help set Libor rates, Barclays was usually at the top end of the spectrum. Mr. Diamond told Bank of England deputy governor Paul Tucker that he believed other banks were divulging artificially low rates.
According to Barclays, the Bank of England official told Mr. Diamond that interest rates did not "always" have to be as high as they were. "Subsequent to the call, Bob Diamond relayed the contents of the conversation to Jerry del Missier," the bank said.
The bank noted that Mr. Diamond did not believe he received "any instruction" from the Bank of England official, nor did he give any orders to Mr. del Missier. "However, Jerry del Missier concluded that an instruction had been passed down from the Bank of England not to keep [the Libor rates] so high and he therefore passed down a direction to that effect to the submitters," the bank said.
The U.K.'s Financial Services Authority investigated Mr. del Missier but decided not to taking action.
"I'm disappointed because many of these behaviours happened on my watch," Mr. Diamond said in a letter to employees. "These explanations are in no way intended to excuse any of the events that occured," the bank added. "These events should have never taken place, and Barclays deeply regrets that they did."