Manipulating the Global Financial Markets: "Done... for you big boy"

On Thursday, Dec. 14, 2006, a derivatives trader at Barclays (NYSE: BCS  ) emailed a trader on the money markets desk, who we'll call Ted. It read: "For Monday we are very long 3m cash here in NY and would like the setting to be set as low as possible...thanks." The email was followed by another, this time from a fellow money markets trader urging, "You heard the man."

The second money markets trader then emailed the derivatives trader back, confirming that Ted "will take notice of what you say about a low 3 month."

Ted did indeed take notice. Two seconds after the final email, Ted set a calendar reminder on his desktop for the following Monday that simply said: "USD 3mth LIBOR DOWN." As promised, when Monday rolled around, Ted delivered a fixed submission to Thomson Reuters, which tabulates LIBOR for the British Bankers Association. As a result, Ted affected a market worth hundreds of trillions of dollars and relied on by companies all over the globe.

Digesting LIBOR
Ted was among numerous Barclays money market traders who made submissions for the calculation of LIBOR, a central benchmark lending rate for banks and companies around the world.

LIBOR, which stands for "London Interbank Offered Rate," is supposed to represent the interest rate at which major banks can borrow from each other. For instance, if Barclays wanted to borrow money for three months from Bank of America (NYSE: BAC  ) , what rate would Barclays have to pay? Traders in Ted's position at major banks around the world are responsible for submitting their best estimate of what that rate is. The highest and lowest few of those submissions are then tossed and the rest averaged out to get to the final LIBOR rate.

LIBOR = a financial markets cornerstone
You may be tempted to gloss over this whole ordeal because of the "London" in LIBOR ("We're in America damnit!") and the fact that some of this sounds a bit esoteric. But in an era of media overhype of nearly everything, this is a truly market-shaking scandal.

If you need a view into just how crucial LIBOR is here in the U.S., then you don't need to look very hard. Investors reading Rite Aid's quarterly report filed on Tuesday may have noted that its credit facility is priced based on LIBOR -- specifically borrowings cost the company "between LIBOR plus 3.25% and LIBOR plus 3.75%." Also on Tuesday, Prospect Capital Corp (Nasdaq: PSEC  ) -- a business development company that lends to and invests in medium-sized businesses -- submitted a filing for new debt. A perusing of that filing reminds investors that when Prospect makes investment loans, it often prices those loans based on LIBOR.

Look further and you'll see it everywhere. Coca-Cola has more than $1 billion in LIBOR-based debt, UPS has multiple credit facilities priced based on LIBOR, and Chesapeake Energy has more than $5 billion in credit available that can be priced based on LIBOR. When you hear global companies like Coke talk about taking interest rate derivative positions as a hedge, LIBOR is typically part of those transactions. And of course LIBOR is front and center when banks are doing business with each other.

So Barclays traders manipulating LIBOR rates -- or, at least, attempting to do so -- is not some backwater finance footnote that you can safely pass over. This is the stuff that is constantly pumping through the veins of the global capital markets.

Ted wasn't alone
Ted and his two pals highlighted above were far from the only Barclays traders taking part in this type of manipulation. In fact, the U.K.'s Financial Services Authority's report on the scheme provides some pretty interesting reading -- if for no other reason than highlighting just how brazen these traders were in putting in their "fixes."

A few of my favorite exchanges:

Trader One: "If it's not too late low 1m and 3m would be nice, but please feel free to say 'no' ... Coffees will be coming your way either way, just to say thank you for your help in the past few weeks."

Submitter One: "Done...for you big boy."


Trader Two: "The big day [has] arrived... My NYK are screaming at me about an unchanged 3m libor. As always, any help wd be greatly appreciated. What do you think you'll go for 3m?"

Submitter Two: "I am going 90 altho 91 is what I should be posting."

Trader Two: "[...] when I retire and write a book about this business your name will be written in golden letters [...]."

Submitter Two: "I would prefer this [to] not be in any book!"


Submitter Three: "Hi All, Just as an FYI, I will be in noon'ish on Monday [...]"

Trader Three: "Noonish? Whos going to put my low fixings in? hehehe"

Submitter Three: "[...] [X or Y] will be here if you have any requests for the fixings."

What's next?
Barclay's response to this has been a bit comical. After being hit with big fines from the FSA and the U.S. Commodity Futures Trading Commission, Barclays' executive management said they'd go without bonuses for the year -- nice move, fellas.

A normal, reasonable person probably would have realized that for an offense of this magnitude that action would be far short of what was required. Barclays didn't get the memo. Only as pressure continued to mount did the chairman of the bank offer to step down. It took some further serious cajoling and late-night calls from high-ranking regulators to finally get CEO Bob Diamond to call it quits as well.

But this is far from over.

Barclays, of course, is not done being dragged across the coals. But now the whole system of setting LIBOR has to be up for discussion -- for a rate so crucial to the global financial system it's laughable how effortlessly Barclays' traders lobbed in fixed submissions.

Perhaps the even bigger question, though, is whether or not Barclays really is the only place where this was going on. When it comes to U.S.-dollar-based LIBOR, rates are set based on submissions from 18 banks, Barclays plus:

  • Bank of America
  • Bank of Tokyo-Mitsubishi UFJ
  • BNP Paribas
  • Citibank (NYSE: C  )
  • Credit Agricole
  • Credit Suisse
  • Deutsche Bank
  • HSBC
  • JPMorgan Chase (NYSE: JPM  )
  • Lloyds Banking Group
  • Rabobank
  • Royal Bank of Canada
  • Societe Generale
  • Sumitomo Mitsui Banking
  • The Norinchukin Bank
  • The Royal Bank of Scotland
  • UBS

Regulators are now taking a closer look at many of these banks for similar transgressions.

Of course when it comes to actually investing in banks, these massive global giants that can't seem to get out of their own way aren't the only choices. To see why smart investors have been looking at banks and how you can dive into the sector via a small, high-quality bank that dominates its market, download a free copy of the special report, "The Stocks Only the Smartest Investors Are Buying."

The Motley Fool owns shares of JP Morgan Chase, Chesapeake Energy Corporation, Coca-Cola, Bank of America Corporation Com, and Citigroup. Motley Fool newsletter services have recommended buying shares of Coca-Cola and Chesapeake Energy Corporation. 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.

Fool contributor Matt Koppenheffer owns shares of Barclays and Bank of America, but does not have a financial interest in any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or Facebook. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.

Read/Post Comments (32) | Recommend This Article (32)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 05, 2012, at 5:02 PM, bleeg10 wrote:

    Matt great article. Question for you. Since the LIBOR removes the top and. Ottom bids, and of Barclays was submitting really low bids, would the LIBOR calculation exclude their submissions and hence not have such a drastic change? Is the real question about the possibility of other banks doing simir things? Do I have that right?

  • Report this Comment On July 05, 2012, at 5:39 PM, epnelson63 wrote:

    People should be put in jail for this, it is outright fraud.

  • Report this Comment On July 05, 2012, at 5:41 PM, mtf00l wrote:

    Integrity is dead. All ratings agencies are rigged.

  • Report this Comment On July 05, 2012, at 5:41 PM, TerryHogan wrote:

    I wonder how much they actually affected rates. I mean, if 1 guy from 1 bank put in one basis point lower than he actually should have (as indicated in the email) it should have a negligible effect on LIBOR. Plus, what if there were others at other banks putting in 1 basis point higher in trying to manipulate rates, wouldn't these cancel out? The bigger joke could be that these guys were just playing Shaman. If I call him and want 3-month rates to go up and by coincidence, they do the next day, he says "Yeah it was all me!" and takes credit. If they don't go up, he simply says "Well, I did my best, sorry."

    To me, to get any kind of definite movement worth betting on, you would need collusion between several banks. Is there evidence of this yet?

  • Report this Comment On July 05, 2012, at 5:50 PM, TMFKopp wrote:


    To some extent and yes.

    First, Barclays submitters did aim specifically to get booted from the calculation (high and low) in some instances. The way to think about that is this: If Barclays is low enough to be excluded as one of the low-end outliers, then you end up with some other low submission ending up in the calculation, (theoretically) bringing it down.

    And yes, there is definitely a concern that other banks are/were doing this as well. In fact, a memo from Bob Diamond was released earlier this week... (summarizing here) it suggested that Diamond told one of the Bank of England deputy governors that other banks were coming in lower than they should have and the response was "well, you don't have to be so high then, do you?"

    BAM! So not only does that throw basically every other LIBOR-submitting bank under the bus, but it brings the Bank of England (and higher echelons) into the mix as well.


  • Report this Comment On July 05, 2012, at 5:51 PM, DonkeyJunk wrote:

    ^The possibility of negligible effect does not justify manipulation. There are no "degrees of cheating."

  • Report this Comment On July 05, 2012, at 5:54 PM, TMFKopp wrote:


    "The bigger joke could be that these guys were just playing Shaman."

    It could be and wouldn't be unheard of for traders to believe in magic.

    But that they would call in these fixes when their butts were really on the line at least suggests that they have a good sense that it works. But I don't count out your hypothesis.

    "To me, to get any kind of definite movement worth betting on, you would need collusion between several banks. Is there evidence of this yet?"

    No, but it would shock me not one iota if that came out. Some of the "favors" that Barclays traders were calling in were coming from outside the bank, so who knows there. Based on the Bob Diamond email I mentioned just above, it doesn't *sound* like Barclays was mixing it up with other banks, but this whole thing is a big tangled mess and it's going to take some doing to ferret out all of the wrong doing and separate the truth from fiction.


  • Report this Comment On July 05, 2012, at 5:55 PM, TMFKopp wrote:


    "^The possibility of negligible effect does not justify manipulation. There are no "degrees of cheating.""

    Precisely. Doesn't matter a bit whether it had any effect on the LIBOR calc. The fact is that they were very obviously making false submissions.


  • Report this Comment On July 05, 2012, at 6:35 PM, Synchronism wrote:


    The fact someone has been caught justifies the presupposition that this has been happening for awhile.

    Clearly conflicts of interest cannot be expunged and mere disclosure does not prevent abuse. This case even spits on the faces of industry associations and certain finance-oriented institutions for professionals.

  • Report this Comment On July 05, 2012, at 6:57 PM, whatevmatil wrote:

    People don't seem very upset by this LIBOR fixing, perhaps they don't understand why it matters. All citizens should be outraged.

  • Report this Comment On July 05, 2012, at 7:56 PM, neamakri wrote:

    Bankers have Five Star Hubris!!

    Oh My God.

    First, thanks for writing this thought-provoking article.

    It just occurred to me that they used to hang horse thieves in the old west. Good enough for these guys, too.

  • Report this Comment On July 05, 2012, at 8:25 PM, hank321 wrote:

    This is about one bank submitting a rate 1 basis point higher or lower than otherwise? That is what i read in your article.

    I agree with tTrryHogan,..based on the dialog in the article here there appears to be less cause for mania than headlines suggest.

    One submitter lowered one days rate submission at one bank by 1 basis point? I seriously doubt that had any overall impact at all. I certainly hope there is better evidence of actual harm than that,...given all the screaming and garmet ripping going on.

    All the talk has been about how much debt is dependent on LIBOR, but that number is not the same as any net effect on Interest.

    If many banks were doing this, what makes you so sure that the net impact was different from zero? If I were sitting on a jury, what i have seeen so far would not lead me to a vote for conviction. I would need to see real evidence of something tangible,...not alleged.

  • Report this Comment On July 05, 2012, at 8:37 PM, TMFKopp wrote:


    Hmmmm... So should I read your reaction as a saying it's OK for a bank to deliberately try to manipulate LIBOR to benefit its traders' positions?

    Also, just to be sure we're on the same page here, it was far from just one submitter -- I think the FSA's final tally (and this is just those instances where it had tangible evidence like an email or IM string) was close to 200 instances.


  • Report this Comment On July 05, 2012, at 8:44 PM, TMFGalagan wrote:

    Hank321 - "All the talk has been about how much debt is dependent on LIBOR, but that number is not the same as any net effect on Interest."

    A single basis point on $850 trillion in loan and derivative exposure is $85 billion annually. Seems like a decent-sized overall impact to me.


    dan (TMF Galagan)

  • Report this Comment On July 05, 2012, at 11:37 PM, Synchronism wrote:

    @ hank

    Isn't such thinking the reason why the subprime crisis happened in the first place?

    I remember reading somewhere that it had something to do with the "oh it's too small for anyone to notice and someone else will be ethical about this, not me" mentality.

    Fine, the impact of one bps from one bank is a drop in a bucket for a financial system worth trillions. Repeat that number across trades, across multiple banks, and for each one there's someon's trust being broken for the sake of quick and easy, risk-less profit.

    People constantly test boundaries, and sooner or later, if no one acts, it could be an industry norm or the bps discrepancies are no longer in single-digit bps.

    It may seem unlikely and improbable from a statistical standpoint, but then again, so were the subprime crisis, the Euro crisis, mf global's big screw-up, and other "black swan" events.

    I say nip the flower before it blooms. Prevention is easier to swallow, but requires discipline people do not and will not generally have. If it was, we wouldn't be having the Euro crisis and the US fiscal cliff in the first place!

    Another scandal will probably break out again in a few more years and people will forget this ever happened.

    As usual.

  • Report this Comment On July 06, 2012, at 5:30 AM, XMFSinchiruna wrote:

    Let's keep in mind also that Barclays was fined $450m by a trio of authorities in the U.S. and UK, and according to the U.S. Department of Justice that took into consideration Barclay's cooperation with ongoing investigations into the LIBOR-manipulating activities of as many as 20 other major banks. This story is so much bigger than the Barclays incidents alone.

    Also: "there were some occasions when Barclays’s submissions affected the fixed rates"

    This is the largest banking scandal of the 21st-century:

  • Report this Comment On July 06, 2012, at 6:11 AM, XMFSinchiruna wrote:

    And on the important collusion issue, this is from Bloomberg back in February:

    "Investigators also have received e-mail evidence of potential collusion between firms setting the London interbank offered rate, said the people, who declined to be identified because they weren’t authorized to speak publicly."

  • Report this Comment On July 06, 2012, at 10:03 AM, TMFDarwood11 wrote:

    Great post!

    I agree with other comments that this has most likely been going on for a while. I too wonder how far afield this practice has been, and how many banks were involved.

  • Report this Comment On July 06, 2012, at 10:47 AM, WestBend1 wrote:

    It's not that the 1 basis point change in rate is not significant, it's the fact that these traders are using inside information to benefit their trades.

    If you know what at least a few of the players are going to vote in moving the rate, it increases the odds of being on the correct side of the trade and reduces the chances of being on the wrong side of the trade. This is a big deal when being on the right side 6 out of 10 times makes you a hugely successful trader.

    Imagine the same thing with stocks. A stock trader would say to a huge mutual fund or hedge fund, "Come on, you're going to be buying the stock anyway. Could you just let me know when or at what price range you will be buying?"

    The trader could then place his/her trade betting on the the highly probably outcome that the stock price will rise in that time.

    It's wrong because this advantage is not available to us average joes without all the information.

  • Report this Comment On July 06, 2012, at 10:58 AM, whereaminow wrote:

    I am awful confused on why the manipulation of the LIBOR rate by 16 bankers is fraud, but central planning of the interest rate by the Federal Reserve (which is manipulation) is not.

    I know what "the law" says. I'm talking about real fraud, in relation to property rights. Money being property.

    David in Liberty

  • Report this Comment On July 06, 2012, at 12:35 PM, hank321 wrote:

    Honestly folks, I feel, based on what has been made public so far, that this IS NOT a big deal at all.

    The idea that the discussion in the article mpacted $85 B in trades is pure hyperbolic nonsense, galagan,...? What is your motive for this kind of exaggeration?

    850 trillion (if it is actually that sized, I have heard 4 different number s in the last day) of total debt set on LIBOR, was not set at a single rate,....but over a period of years. What is the net impact of the alleged shaved submissions,...? you implicitly suggest it is $85 B,....but that is just inflamtory groundless conjecture. Do you have actual evidence?

    The rate is set not by any one bank's submission,...but is assembled by a 3rd party and a weighted average is published. If some banks exaggerate a basis point up, while others exaggerate down a similar amount (not implausible) it is entirely possible there was no net impact at all. Plus, the banks do not publish the data,.....they submit their estimates ESTIMATES,.....who actually publishes the data,....hmmm,... is it that Association,...or is it the Bank Of England ?

    Do you imagine that the Bank of England has no input to what the final published rate is?

    I am sorry, but I feel deeply skeptical of the real significance of the allegations shown so far. If there is wider evidence,...fine, show it. At the moment, I am not about to be stampeded by what some journalists are saying. they are too regularly manipulated for political purposes.

    Were banks colluding to control the submissions?? Any evidence of that so far?

  • Report this Comment On July 06, 2012, at 12:42 PM, hank321 wrote:

    BTW, I am trying to approach this dispassionately.

    There is just to much hip-shooting going on, too much grandstanding, too many breathy pronouncements, by semi-infomed people eager for "good copy" and not too concerned about the details of their facts.

    So far, the evidence seems a bit underwhelming, frankly, let's take a breath and see what is really there.

  • Report this Comment On July 06, 2012, at 12:52 PM, hank321 wrote:

    The US FED influences our equivalent of the Interbank rate all the time, routinely. They set a target,...and use the discount window.

    I imagine that Bank of England uses a different technique,...but somehow it also influences the published LIBOR rate.

    What makes folks here so sure that a few random junior traders at Barclays actually influenced any published rate at the end of the day? that seems very doubtful, indeed,....but perhaps possible, it does need to be looked into.

    There was a civil penalty paid, clearly, the traders were not supposed to even think they could influence a rate submission. But the technical violation does not prove that an adverse impact even occured,...why assume that it did in the absence of evidence? What is the motive for that?

  • Report this Comment On July 06, 2012, at 1:01 PM, hank321 wrote:


    It is not ok for a bank to try to manipulate the LIBOR,....but I doubt seriously any single bank can do this ...except on rare occasions.

    In the US, the FED has ample means tB control the FED funds target rate. I doubt the Bank of England and/or the tTeasury does not have this capability,...although it may be more privately implemented.

    I want to see evidence that a BANK was trying to do this (and not 2-3 traders), and to be really convinced of any thing truly nefarious, I want to see credible EVIDENCE of collusion (not rumors, or unattributed allegations).

  • Report this Comment On July 07, 2012, at 2:09 AM, Evway wrote:

    How would you determine LIBOR? Write the rules.

  • Report this Comment On July 08, 2012, at 12:26 AM, Atlantis123 wrote:

    Simple to fix the market... each bank is given a day hour or minute to put in a "fix" immediately the other banks follow sending the charts up or down as desired. Then the next bank in line makes it's move, the other banks follow.... you see the pattern. THEY don't need to actually speak, email, text etc.. as each bank is given it's turn and all others follow knowing the outcome of when to buy or sell. When you have ALL the money, it's very easy to take that which isn't yours. If we all stop playing, the banks would have to feed on each other.

  • Report this Comment On July 08, 2012, at 10:22 PM, NotJesseL wrote:

    The submitting an incorrect report is pure and simple fraud. I guess it happens a lot, most of the time the injured parties are just a few in number. This time it affects practically everybody, but just a little bit. Its a bit like urinating in the public's drinking water, the effect gets diluted, but you still don't want to allow it.

  • Report this Comment On July 11, 2012, at 7:53 PM, hank321 wrote:


    i agree that the traders in this article committed a fraud,...but I suspect there was no tangible impact. At any rate, the evidence does not demonstrate that there was an impact.

    In this case, to use your anology, some traders at a single bank out of 18 may have urinated, while others may have anti-urinated (both in tiny quanities)....meaning shaved off or added-on a basis point. On a net basis, the impact, may well be zero, or nearly zero.

    So fine the individual perps, and stop screaming for dramatic effect about billions in losses that may not even exist. If losses do exist,...then kindly provide the real proof.

  • Report this Comment On July 13, 2012, at 12:52 PM, Lucaskasan wrote:

    All I know is that just a few months ago, my online savings rate suddenly went from 2.25% to 0.40% with no explanation whatsoever (and so did everybody else. I know because I went shopping right away for a new account). It is not like the Fed lowered their rates or something. Those have been near zero for several years now.

  • Report this Comment On July 13, 2012, at 6:10 PM, jonesericr wrote:

    Hey why just a bank why not keep your cash in a credit union? I haven't had a bank since the 80's and I do remember when some enterprising folks were trying to shutdown Credit Unions. So far so good but don't peek behind the curtain.


  • Report this Comment On July 13, 2012, at 9:11 PM, lesailes wrote:

    In criminal prosecution the thing that matters is intent. There was intent to mislead.

    The next question is as to whether this was confined to individuals or were the traders encouraged by management direction or policy? I don't know.

    The question of responsibility is clear and cannot be the subject of the Murdoch defence - my employees were evil and mislead me!

    The question of whether other institutions were involved is irrelevant to the question of the guilt of Barclays.

    The standard of behavior in modern banking seems clear: the question as to whether this was the right thing to do never seemed to arise (in the limited amount of evidence I am aware of) .

    Of course this is a reflection of the state of modern society in general, just look at some of the comments above..

  • Report this Comment On July 14, 2012, at 8:09 PM, ChrisBern wrote:

    If this was such a big deal, then why didn't Timothy Geithner and the NY Fed (which he led at the time) do anything about when they KNEW ABOUT THIS in 2008???

    2 possibilities: (a) either this is no big deal, OR (b) it IS a big deal, Timothy Geithner needs to resign his current position, and the NY Fed needs to be brought under investigation.

    Of course nothing will happen to Geithner, the NY Fed, or big banks like JPMC because they are "immune" from the rule of law. Which is criminal in and of itself.

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