Here the Berg Banking and Financial Dispute team bring you the second part of our 3-part blog series that takes a detailed look at LIBOR and LIBOR rigging.
In our previous blog we looked at what the LIBOR benchmark is, and how LIBOR was to be calculated each day. We also set out the basis upon which the manipulation was to be based, and, crucially, why manipulating LIBOR was undertaken in such great numbers by
bankers and traders.
In part 2 of the blog we look at the part bonus culture and lack of clear guidelines had to play:
It was realised by the Banks that they had significant liabilities or profits when derivatives were set each week, month, quarter or half yearly. By being able to move LIBOR rates up and down, even by a small fraction, traders understood that they could either
increase a profit for a swap that was in the money (i.e. the bank was being paid by the counter-party) or, just as crucially, the bank could mitigate its losses if the swap was out of the money and the bank had to make the payment.
Bonus culture: All in the name of profit?
All traders know that their annual bonuses will depend on how much profit they have driven personally. With bonuses of up to £5 million, the search for extra profit drove some traders to commit illegal/improper actions in order to maximise profits and reduce,
minimise and expunge losses. This happened across banking for other products also, and led to scenarios in which PPI was being sold to retail customers that did not want it or need it, swaps and fixed rate loans were being sold to commercial customers and
traders started manipulating LIBOR; all in the name of profit.
As noted previously, it has not been fully identified what triggered LIBOR manipulation. Different triggers occurred at different banks. Certainly the relaxation of regulations led to banks increasing their profits from 2005/06 onwards, with different banks
taking similar routes to the increases in profits.
The traders, who made the most profits for the banks, received substantial bonuses. Bonuses were the primary income for these people.
A gentleman’s code: Lack of guidelines
Since 2006 the traders (principally, some of the manipulation was also for the benefit of other reasons, such as PR, and also for the benefit of traders at other banks) would look at what derivatives were going to be set on any given week or day and would slowly
arrange for their LIBOR submitter to start increasing or decreasing their submissions each day in order to try and manipulate what the actual rate was published at on a specific day. Because the derivatives were in the hundreds of millions and sometimes in
the billions, the movement in LIBOR only needed to be fractions of a percent. In some instances the manipulation of the LIBOR rates submitted is quite obvious, in other cases less so. This was aided by the fact that no bank had any actual or clear guidelines
on how LIBOR submitters should perform their job.
By 2007 LIBOR manipulation was so blatant and so rampant that requests to a Bank’s LIBOR submitter were overt and contained in instant messages or emails. This is how the regulators were able to uncover what happened. The regulatory findings against Barclays
contains a broad range of emails and instant messages that reveal the true nature of the manipulation, which may only be classified as blatant.
In hindsight it is very easy for us to view what occurred as being avoidable. However, the banking environment generally was based upon the fact that the city “gentleman’s” code of honour and reputation of fairness underpinned much of the mechanics of submitting
data to set the prices for many things, including (amongst a very large number of other things) LIBOR, the price of gold, the price of shares in a dark pool, the rate of exchange for foreign currencies etc. The banks understood what data was needed and they
were best placed to provide it – indeed, no one else could. These data setting submissions for a wide range of products took place over decades. No one needed to tell the banks not to commit fraud, the whole banking system was designed based upon the unwritten
code and assumption that they would not. That may, to us, seem naive, but when taken in consideration of how these systems arose since the 1950s it does make sense. The 2001 changes in Banking regulation was thought to have removed the last vestiges of issues
that would arise. Unfortunately, the extent of the end of century understanding of honesty amongst city professionals did not take, fully, account of the race for profits that arose, and this has led to a significant minority of traders taking advantage of
a system that ought to have worked and had done so for a long time.
This blog is Part 2 of a 3-part blog series that takes a detailed look at LIBOR rigging.
You can view LIBOR Rigging – What is it? Part 1 here. The third installment of this blog series coming later this week.
For more information about any of the above or for practical advice on this or any other aspect of banking and financial disputes, please contact
Kalvin Chapman of the Berg Banking Litigation Team on 0161 829 2599 or email him at
(The information and opinions contained in this article are not intended to be comprehensive, nor to provide legal advice. No responsibility for its accuracy or correctness is assumed by Berg or any of its partners or employees. Professional legal advice should
be obtained before taking, or refraining from taking, any action as a result of this article.)