Another Business Day, Another Bank Scandal

Barclays (NYSE: BCS  ) goofed, and it will be paying record fines to regulators. Since the news broke last week, Barclays shares dropped more than 15%. The executives, hoping to preempt any other punishment, voluntarily gave up their bonuses for the year, but many are calling for their removal. Just what happened, in easy-to-understand terms? And what could this mean for other bank stocks?

Same old, plain old cheating
Barclays is the first of more than 20 banks under investigation to settle over manipulating the London interbank offered rate, or Libor. The Libor rate is used as a benchmark for a multitude of financial products, from loans to mortgages to credit cards (like the "prime rate" in the U.S.). To calculate this rate, the British Bankers' Association asks banks every business day at what rate they could borrow funds, the outlier answers are thrown out, and the remaining answers are averaged together.

After a four-year investigation, the Commodity Futures Trading Commission, the Department of Justice, and Britain's regulatory body, the Financial Services Authority, found that Barclays had been submitting manipulated rates that helped determine Libor from at least 2005 to 2009. Why would Barclays attempt this? There are two reasons.

One, submitting artificially lower rates would make it seem Barclays' finances were better off than they actually were. Investors could observe its reportedly low borrowing costs and assume the bank was less risky than in reality. Two, Barclays traders who had bets influenced by Libor wanted to win those bets. The emails between traders and those who submitted the bank's Libor rate are a fantastic reminder to everyone why you should never leave a paper trail:

"Done ... for you big boy..." (April 7, 2006, Submitter's response to swaps trader requests for low one-month and three-month U.S. Dollar Libor)

And this exchange, which is also troubling for other banks under investigation:

Barclays' Senior Euro Swaps Trader discussed the need for low one month Euribor [a similar rate to Libor] with traders at Bank A and Bank B, and contacted a trader at Bank C...then reminded Barclays' Senior Euribor Submitter of his request...Barclays' Senior Euro Swaps Trader responded: "I love you."

For these offenses, Barclays paid $450 million in fines, Chairman Marcus Agius resigned, and many are calling for the resignation of other top executives, like CEO Bob Diamond.

The other shoe has yet to drop
The Department of Justice states, "the agreement and monetary penalty recognize Barclays' extraordinary cooperation." Therefore, being the first bank to settle may have given Barclays a break compared to other banks under investigation, which include Citigroup (NYSE: C  ) , UBS (NYSE: UBS  ) , HSBC (NYSE: HBC  ) , and Royal Bank of Scotland (NYSE: RBS  ) . And if Barclays was given a break while being charged record-setting fines, it's not good news for the potential fines on other banks.

These banks aren't new to the scandal. As reported in February, Citigroup was forced to write off $50 million to close positions made by two employees who were accused of manipulating the Tokyo interbank offered rate (yes, referred to as Tibor). UBS and RBS suspended or fired traders last year due to the rate manipulation investigation. Bloomberg reported in February that HSBC was submitting some near record-low rates to the Libor survey, even while the market suggested its rates should have been rising.

So far, these banks' stocks haven't been punished as badly as Barclays'. But with the uncertainty surrounding the potential fines and changes in management, any news could see serious price moves.

A fearful sector
This scandal brings even more uncertainty into the financial sector, and draws even more ire from a public fed up with slimy bankers. If you think this scandal is just a small blip, there will definitely be bargains. If you think this is another disgrace in a broken industry, take it as more proof to stay away from investing in these companies.

If you're looking for a financial stock far away from London, read our free report: "The Stocks Only the Smartest Investors Are Buying." This report highlights a stock Buffet himself would be interested in, and best of all, the report is free.

Fool contributor Dan Newman holds no position in any of the above companies, and hopes if you do, you have a strong stomach. Follow him @TMFHelloNewman.

The Motley Fool owns shares of Citigroup. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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