libor developments July 3, 2012
Posted by Bradley in : financial regulation , add a commentYesterday, Marcus Agius, the Chairman resigned and then Bob Diamond, the CEO, resigned with Agius becoming full time Chairman and in charge of finding Diamond’s replacement. Jerry del Missier, the (recently appointed) COO (who was at Barclays Capital during the period of the Libor problems), also resigned. Mervyn King seems to have played a role in these developments. Monday’s announcement of Agius’ resignation was pretty clearly designed to protect Diamond. After all, the press reports before Monday focused on whether Diamond’s position was secure.
The Treasury Select Committee will hear from Diamond at 2pm on Wednesday.
The Chancellor made a statement in the House of Commons yesterday. He was very critical, asking, for example:
what urgent changes are needed in the regulation of LIBOR and other markets to prevent such abuse occurring again and to ensure that the UK authorities have the powers they need to hold those responsible to account; and the wider issue of what went so badly wrong in the culture of our banking system and the way it was regulated, allowing such fundamental failures of basic standards of conduct to go unchecked and unchallenged.
The interest rate manipulations were pretty shocking, but Osborne lives in a world where politicians have exaggerated their expenses claims and been over-friendly to unsavory news organizations. Perhaps he shouldn’t be so surprised.
A number of MPs pointed out that Osborne and other Conservatives hadn’t been so keen on regulating banks when they were in opposition. For example, here’s Glenda Jackson:
welcome the Chancellor’s commitment to broad-ranging and hard regulation for the British banking system—a position eschewed like the plague by his colleagues when they were in opposition. Will he guarantee that the powers given to the FSA will ensure that it is genuinely what many of my constituents have campaigned for for some time: a banking watchdog, not a lapdog?
Anyway, there will be a review of what needs to be done to fix regulation relating to this issue by Martin Wheatley, the chief executive designate of the Financial Conduct Authority. The review:
will include looking at whether participation in the setting of LIBOR should become a regulated activity, at the feasibility of using actual trade data to set the benchmark, and at making initial recommendations on the transparency of the processes surrounding the setting and governance of LIBOR.
His report will be produced “this summer” so that any conclusions can be fed into the new rules on financial regulation, either in the Financial Services Bill or legislation on banking reform.
The House of Commons spent some time wondering why what happened wasn’t a criminal offence (especially when they had constituents who had been charged with criminal offences over much smaller sums of money). That the SFO decided not to prosecute doesn’t necessarily mean it decided that no crime had been committed but could be based on concerns that it would be difficult to achieve a conviction.
The language of section 2 of the Fraud Act 2006 does seem to be broad enough to cover what was done. Under s. 2 a person commits fraud by dishonestly making a false representation, and intending by doing so to make a gain for himself or another. A false representation (which may be express or implied) is one which is untrue or misleading, where the person making it knows that it is, or might be, untrue or misleading.
False representations to the BBA about the rates at which Barclays could borrow funds in the interbank market could be seen as falling within this very general language. But the statute does not expressly cover statements whose effects are indirect. The explanatory notes on s 2. make it clear that the provision is meant to refer to representations made to the world at large (on a website) or to large numbers of people (such as phishing). But the explanatory notes seem to imply that what the section applies to is situations where representations are made directly to the victims of the fraud. There’s a specific provision for representations made to machines (such as ATMs). The explanatory notes state:
The main purpose of this provision is to ensure that fraud can be committed where a person makes a representation to a machine and a response can be produced without any need for human involvement. (An example is where a person enters a number into a “CHIP and PIN†machine.) The Law Commission had concluded that, although it was not clear whether a representation could be made to a machine, such a provision was unnecessary (see paragraph 8.4 of their report). But subsection (5) is expressed in fairly general terms because it would be artificial to distinguish situations involving modern technology, where it is doubtful whether there has been a “representationâ€, because the only recipient of the false statement is a machine or a piece of software, from other situations not involving modern technology where a false statement is submitted to a system for dealing with communications but is not in fact communicated to a human being (e.g., postal or messenger systems).
But this situation is different from the sort of indirect representations made in the context of any attempted manipulation of Libor rates. And this sort of uncertainty is problematic in the context of criminal statutes.
libor review June 30, 2012
Posted by Bradley in : financial regulation , add a commentThe government is to order a review of the operation of the inter-bank lending rate, or Libor, following revelations of its frequent abuse by Barclays and other banks.
uk regulators on financial regulation June 29, 2012
Posted by Bradley in : financial regulation , add a commentSome highlights from the Bank of England’s press conference about the June 2012 Financial Stability report (the Report is available here):
Mervyn King and Adair Turner agree there is a major cultural challenge especially with respect to investment banking.
King says that Libor should be based on actual market transactions, not on quotes (and that it looks more likely now that this will happen than before the beginning of this week) although he and Turner recognise than there are difficulties in relying on transactions in thin markets.
King and Turner seemed to like the idea of the ECB taking on responsibility for banking regulation, but within the Euro area and not for the entire EU (and the details could be complicated).
The participants seemed convinced of the need to separate out basic banking and investment banking (and that the issues of culture raised by the Libor manipulations are connected to this separation).
facebook account required to vote in mission:small business program June 29, 2012
Posted by Bradley in : life , add a commentI received a notification that a small business I have dealt with had applied for support under the Mission: Small Business program run by Chase and Living Social (and they have produced a credit card together also). The deadline to vote is tomorrow, but in order to vote for a business to receive a grant you need to have a facebook account, which I don’t have (JP Morgan was one of the underwriters of the facebook ipo).
Looking at the JP Morgan Chase website it is striking how much CSR is going on. The 2011 Annual Report states:
We also continued our support of communities. We raised $68 billion for not-for-profits and public services. And we hired more than 3,000 military veterans as a proud founding member of the 100,000 Jobs Mission.
The amount of money donated is smaller. The Chairman’s letter states:
In 2011, JPMorgan Chase contributed more than $200 million directly to community organizations and local not-for-profits. Our employees also provided nearly 375,000 hours of volunteer service through our Good Works program in local communities.
That’s considerably less than the billions of dollars of recent derivatives-related losses.
banks behaving badly: libor scandal, banking culture, more mis-selling June 29, 2012
Posted by Bradley in : financial regulation , add a commentWere the Barclays settlements really A Victory for Regulators (as the front page of the New York Times Business section proclaimed yesterday)?
An e-petition for an inquiry into bankers’ behaviour is now available for signature here (submitted by Ann Pettifor, Director of Prime, “an economic think-tank that promotes understanding of the nature of credit”). Mervyn King says no inquiry is necessary (although he does say there need to be changes to the culture and structure of the banking industry). Cameron agreed with King.
With respect to the Barclays Libor-related conduct in the pre-financial crisis period, Bob Diamond said (in a letter to Andrew Tyrie MP, the Chairman of the Treasury Select Committee):
This inappropriate conduct was limited to a small number of people relative to the size of Barclays trading operations, and the authorities found no evidence that anyone more senior than the immediate desk supervisors was aware of the requests by traders, at the time that they were made. Nonetheless, it is clear that the control systems in place at the time were not strong enough and should have been much better.
There’s a lot in the letter about how important Barclays thinks it is to rebuild trust and fix its systems, and of course much about how lots of other banks behaved badly too. I’m not sure how much that helps Barclays really. After all, the people who are upset about this issue are upset as much because it reinforces their belief that bankers in general can’t be trusted. That it is not just about Barclays makes it worse rather than better.
And, to top it all, there’s more news about bad behaviour by banks from the FSA today: Barclays, HSBC, Lloyds and RBS agreed to provide redress with respect to the mis-selling of interest rate hedging products to some small and medium sized businesses (SMEs).
But when the US Supreme Court holds that the First Amendment protects our right to tell lies (in US v Alvarez, finding the Stolen Valor Act to be unconstitutional), unless we are actually committing fraud or doing a rather limited number of other bad things, why should we expect banks to be careful about what they say?
(update: link to Bank of England webcast of press conference about the June 2012 Financial Stability report, held today).
bba statement on libor enforcement June 28, 2012
Posted by Bradley in : financial regulation , add a commentThe British Bankers’ Association is shocked by yesterday’s report about LIBOR. The banks which contribute to the LIBOR rate must meet the necessary obligations to their regulators. The BBA has proactively co-operated with the authorities at every stage and will continue to work with the regulatory investigations into LIBOR, submitting information and making staff available for interview.
The current LIBOR review, with which our authorities are fully engaged, has been underway since March this year and is considering all aspects including the setting process. As part of this review we will now be asking the authorities to consider in what manner the LIBOR setting mechanism should be regulated in the future.
It is becoming clear that these enforcement actions haven’t increased confidence in the financial system.
Meanwhile, on the issue of sanctioning individuals – something many people commenting on this story have advocated – I was reading a fascinating article by William Simon with the title Where is the “Quality Movement” in Law Practice?. The article is about lawyering rather than banking , and I was reading it for a piece I am working on about peer review, but Simon suggests that when things go wrong there is often an impulse to sanction individuals rather than to fix the procedures which led to the problem:
Law firms appear spontaneously inclined to take the individual perspective. When they are caught in a scandal, they often look for individual wrongdoers and respond by disciplining or firing them.22 A consultant for liability insurers tells me that, when he visits a firm where serious professional failure has occurred, the most common response he hears is, “We had a problem, but we got rid of him.â€
I think that traders who encourage people who have a role in the development of Libor and Euribor to change the quotes they feed in to the system to suit the interests of the traders, as well as the quote submitters who go along with the traders, are not fit and proper people to be employed in financial firms. And figuring out how to prevent this sort of behavior is critical. But firing one or two scapegoats is not the answer.
libor manipulation: who loses? June 27, 2012
Posted by Bradley in : financial regulation , add a commentA number of comments on Robert Peston’s story about the Barclays Libor/Euribor regulatory actions ask who lost out as a result of any manipulation of the rates. During the financial crisis the impact of any manipulation was to produce lower interest rates than those which would have been produced had accurate submissions been made (because the Libor quotes are supposed to reflect the quoting banks’ cost of funds higher rates suggest the market considers the bank to be riskier than lower rates would). It looks as though Barclays wasn’t the leader in submitting low rates in this period. In this period borrowers under existing Libor-based loans would be benefiting as they would be paying lower interest rates than they would had the quotes been accurate. The Justice Department Press Release seems to me to be a bit misleading here. It quotes Assistant Attorney General Breuer as saying:
Because mortgages, student loans, financial derivatives, and other financial products rely on LIBOR and EURIBOR as reference rates, the manipulation of submissions used to calculate those rates can have significant negative effects on consumers and financial markets worldwide.
If Libor etc don’t actually reflect lenders’ cost of funds because the rate setting process manipulates the rates to a level lower than should apply, it is the lenders who suffer. So consumers suffer not because they are forced to pay higher rates than they should but because the inaccuracy of the rates means lenders are less willing to lend at prevailing rates, or suffer from financial distress because they are unable to make profits on their loans. And there are implications for interest rate swaps. But keeping Libor lower shouldn’t have had a negative impact on loan default rates. Would we all have been better off had the banks which quoted rates in the Libor/Euribor rate setting processes admitted publicly that they didn’t know what the rates should be? We’ll never know.
The manipulation to suit Barclays interest rate traders is different. Here the story is that agents of Barclays were manipulating the rates they quoted in order to allow individuals to make profits on their trading positions. And some of those making the requests for manipulation didn’t even work at Barclays, which implies that manipulation was carried out to benefit individuals rather than in the interests of Barclays. The suggestion that employees of financial firms were putting their own personal interests ahead of the interests of the firms that employed them, let alone the interests of the markets or of the taxpayers who would eventually be bailing them out, is what is most striking about this story.
For me this story justifies extreme scepticism of comments that financial firms make in the context of rule-makings about the need to ensure that regulation does not interfere in the operations of the financial markets (such as this comment by Barclays Capital on the Volcker rule proposal).
libor: cftc, doj, fsa fine barclays June 27, 2012
Posted by Bradley in : financial regulation , add a commentThe DOJ (fine: $160 million), CFTC (fine $200 million) and FSA (fine £59.5 million) announced settlements of enforcement actions against Barclays Bank with respect to manipulations of Libor and Euribor rates. Other investigations relating to Libor and Euribor involving these and other agencies are ongoing.
Barclays submitted quotes to the US dollar Libor and Euribor setting processes based on requests of its interest rate derivatives dealers, tried to influence the submissions of other banks to the Euribor (and to some extent to the Libor) setting process, and made submissions to the Libor setting process which were designed to reduce negative media perception.
The Financial Services Authority said that Barclays did not have any specific systems or controls relating to the Libor and Euribor setting processes until December 2009. The FSA’s penalty calculation reflected the following factors:
The integrity of benchmark reference rates such as LIBOR and EURIBOR is of fundamental importance to both UK and international financial markets. Barclays’ misconduct could have caused serious harm to other market participants. Barclays’ misconduct also created the risk that the integrity of LIBOR and EURIBOR would be called into question and that confidence in or the stability of the UK financial system would be threatened.
The agencies noted that Barclays co-operated in the investigation, and the FSA allowed Barclays a discount of 30% for settling at an early stage.
Although much of the speculation in the press about abuses of the libor setting process focused on the financial crisis, Barclays derivatives traders made requests to those responsible for making rate submissions going back as far as the beginning of 2005. The FSA’s final notice cites emails and instant messages by the traders, and tracks the extent to which submissions seem to have followed the email requests. This story of manipulation of the interest rate setting process and of lax compliance is shocking. And focusing on fining the corporate entity doesn’t seem to me to go far enough. The DOJ notes that its non-prosecution agreement applies to Barclays and not to the individuals involved, but I would like to be reading that the corrupt derivative traders who tried to fix interest rates to benefit themselves (and who wrote about sharing bottles of Bollinger with those who helped them) are being subjected to lifetime bans from employment in the financial markets, imprisonment, and disgorgement of their ill-gotten gains.
more on transparency (in the eu) June 25, 2012
Posted by Bradley in : transparency , add a commentI have an article coming out in the Fordham International Law Journal with the title Transparency and Financial Regulation in the European Union: Crisis and Complexity. It’s available from SSRN. Here is the abstract:
The Lisbon Treaty came into force in the European Union as the global financial crisis developed into a European sovereign debt crisis. Transparency is a component of accountability, and a means of addressing the EU’s democratic deficit. The Lisbon Treaty established a new commitment to transparency within the EU. However, urgency and complexity make transparency harder to achieve, and the European Union has not achieved transparency with respect to urgent matters such as the financial and sovereign debt crises and complex issues such as financial regulation. The EU has made significant structural changes to financial regulation, and the increasing institutional complexity of the EU means that sources of information about the EU’s policies have increased in number, adding to problems of information overload. In response to the financial crisis the EU has introduced many new rules of financial regulation. At the same time, although multilingualism is a core feature of the EU, the EU’s new financial authorities issue technical consultations only in English. Because the EU has committed itself to transparency in the Treaties the EU’s institutions must work to increase citizens’ ability to navigate the information which is available to them. And the EU’s institutions should do more to increase access to information about the development of EU policy, by implementing the EU commitment to multilingualism more effectively, and by not allowing crises and technical matters to divert them from the imperatives of transparency.
international widows’ day June 23, 2012
Posted by Bradley in : events , add a commentJune 23 was designated international widows day in 2010 by the UN General Assembly. It has also been designated United Nations Public Service Day (in 2002).