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Record fine on Barclays renews bank debate

The announcement Wednesday by U.S. and British regulators of $450 million in penalties against Britain’s giant bank Barclays PLC for attempted manipulation of interest rates affecting U.S. consumers reignited debate about executive compensation and the need to further regulate the largest financial institutions.

The U.S. Commodity Futures Trading Commission issued an order Wednesday morning settling charges against Barclays PLC, Barclays Bank PLC and Barclays Capital Inc. The British global bank acknowledged that its employees made false reports about and tried to manipulate two global benchmark interest rates that are referenced when banks determine borrowing costs for buying a home in the United States and taking out a student loan.

The penalties against Barclays included a $200,000 fine by the CFTC, the largest in its history. The complaint centers on how Barclays submitted information used to determine what are known as the LIBOR rate and the Euribor rate.

The two, technically the London Interbank Offered Rate and the Euro Interbank Offered Rate, are actually daily reference rates for lending that are determined by the average of interest rates offered by banks in London and in the European Union.

These reference rates were widely used before the U.S. financial crisis of 2008 – brought on by problems in the housing sector – to determine the rate to which adjustable-rate mortgages, many of them given to the weakest borrowers, would jump after the expiration of low teaser rates.

From about 2005 to 2009, according to the CFTC, Barclays’ submissions for determining the benchmark lending rate were based on recommendations from its traders in complex financial instruments called currency swaps. They’re insurance-like bets on the movement of one currency against another. The company’s swaps traders were trying to benefit their positions in the complex bets by effectively setting the table in their favor.

“People taking out small business loans, student loans and mortgages, as well as big companies involved in complex transactions, all rely on the honesty of benchmark rates like LIBOR for the cost of their borrowings. Banks must not attempt to influence LIBOR or other indices,” Chairman Gary Gensler said in a statement announcing the CFTC’s $200 million settlement.

Regulators in Great Britain announced a similar $93 million settlement with Barclays, and the British bank will pay the U.S. Justice Department’s criminal division another $160 million to settle a related probe.

The bank avoided criminal proceedings by cooperating with authorities, and Barclay’s CEO, Bob Diamond, was contrite in a statement issued on the bank’s Website.

“Nothing is more important to me than having a strong culture at Barclays; I am sorry that some people acted in a manner not consistent with our culture and our values,” he said, adding that he and other top executives would “forgo any consideration for an annual bonus this year.”

Diamond’s action stood in stark contrast to embattled JP Morgan Chase CEO Jamie Dimon. Testifying before Congress recently on a $2 billion bet gone bad, shaving 20 percent of the bank’s share value and creating market turmoil, Dimon wouldn’t discuss if he deserved a bonus this year and said it’d be up to his board to decide.

“It’s refreshing to see a company management take responsibility for actions on their watch, it was disappointing in hearings before Congress that JP Morgan Chase CEO Dimon said there may be (bonus) claw backs but he did not imply that there would be or that he would be part of them,” said Ed Mierzwinski, director of consumer programs for the advocacy group US PIRG. “The buck didn’t appear to stop with him. It appeared to stop below him.”

Dimon’s bad deal has not, at least yet, resulted in a criminal or civil complaint. The Securities and Exchange Commission is thought to be looking into how JP Morgan Chase disclosed its widening problem.

The Barclays case underscores the need for the controversial Volcker Rule, said CFTC Commissioner Bart Chilton. Part of the 2010 revamp of financial regulation, the rule would force large banks such as JP Morgan Chase or Barclays to spin off their proprietary operations if they are also in the business of betting with customers’ money.

In a 34-page letter filed with regulators on Feb. 13, Barclays sought exemption for many of its overseas trading activities from the pending Volcker Rule. Financial heavyweights have aggressively fought to delay the rule-writing, since it affects a prize portion of their business. But in the case of Barclays, the attempted manipulation was designed to benefit its own bets, irrespective of how that might have affected clients and customers.

“If they manipulated the market, and theoretically it didn’t just benefit their proprietary positions, either way it screwed somebody else,” said Chilton. “When push comes to shove, we know who wins – the proprietary position. In Las Vegas, it’s called the house.”

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