The second category of violation happened in conjunction with the financial meltdown. Starting in 2007 and continuing through 2009, traders sought to disguise the elevated interest rates that counterparties were demanding in order to loan funds on a short term basis to Barclays. If Barclays' borrowing rates were perceived as higher than Barclays' competitors, clients of the large dealer banks might conclude that Barclays was an unsafe - or at least less safe - credit risk, and would choose a competitor with which to do business.
The attempt at manipulation of LIBOR rates in the first category - i.e. helping the traders make money even when they were wrong about the LIBOR rate - could have affected LIBOR rates in either direction. Rates might have gone higher, thus increasing the costs to borrowers and consumers, or they may have been set lower than they should have, thus helping consumers and hurting the lenders whose lending costs were set on whatever the BBA determined LIBOR to be. Interestingly, the second category of attempted manipulation of LIBOR rates only helped borrowers and consumers at the expense of lenders who would be receiving less than true value in return for their loans.
The first category of falsified rate submissions occurred in the ordinary course of the trading day, and appeared to be perfectly acceptable to traders on the desk. The DOJ report quotes emails between two Barclays traders where the submission of false rates was discussed and agreed to:
My all-time favorite exculpatory (rear-end covering) statement - one regulator to another - is that "These communications, however, were not intended and were not understood as disclosures through which Barclays self-reported misconduct to authorities."
However these statements were intended - as self-reporting misconduct or just reporting potential misconduct - Barclays was taking the highly unusual step to notify the key regulators in the U.K. and the U.S. that it believed that other banks were fudging the numbers, and that Barclays in response was also fudging the numbers. But, like the end of a scene in Waiting for Godot, the regulators did not move.
Later, we learn that Barclays' CEO Robert Diamond has a conversation with a senior regulator at the Bank of England about the LIBOR submissions by Barclays and by its competitors. As summarized in the FSA settlement:
However, as the substance of the telephone conversation was relayed down the chain of command at Barclays, a misunderstanding or miscommunication occurred. This meant that Barclays’ Submitters believed mistakenly that they were operating under an instruction from the Bank of England (as conveyed by senior management) to reduce Barclays’ LIBOR submissions.
According to a report in the Financial Times, the bank regulator in question, Paul Tucker, somewhat ambiguously - and entirely lamely - mewed to Mr. Diamond that “it did not always need to be the case that we appeared as high as we have recently”.
Whatever explanation may be put forth by the Bank of England, the FSA, the Federal Reserve, and the British Bankers Association, they all had knowledge that the integrity of the process by which LIBOR rates were being set was in severe doubt. Again, why would Barclays - perhaps not the strongest bank, but certainly not the weakest; a bank that was able to survive the financial crisis without a bailout - have higher borrowing costs than Citi or Morgan Stanley or RBS? Sometimes regulators take the view that they know how to calm or soothe the markets, and perhaps sometimes that is true. But, in this case, they used that belief to enter into at best a willful blindness about what they were being told, and what the numbers showed. The LIBOR rates were being fictionalized to hide the true financial condition of the banks from the public.
Of course, the fact that a regulator is being weak, silent, vacillating, and perhaps complicit, is not a justification for a leading financial institution to manipulate the LIBOR rate, even if its purpose is aligned with the regulators': to fictionalize the financial health of the banking system to avoid a public reaction to the truth. At the end of the day, as Ken Lewis learned after the Federal Reserve twisted his arm to buy Merrill Lynch, Bank of America's obligations for full disclosure under the U.S. Securities laws did not evaporate because of pressure coming from an important regulator. The Fed could not waive those obligations. The country does not enter martial law during times of financial crises. The rules are the rules, and even if the regulator wishes for the rules to all go away, only a fool believes that will happen when the dust settles. What role Barclays' compliance officials played in helping the bank slide down this hellhole seems clear from the reports: as self-regulators, they attended meetings, took notes and did not utter a peep.
The other shoe is about to fall, or not, but the Bank of England and the other financial regulators will not be the ones facing civil penalties and possible jail time. That will be left to the regulated firms and their employees who thought they had the best interests of the financial world at heart because the regulators did not tell them what to do or not do.