Barclays: Another Wall Street game fixer

And the punishment for cheating? A weak slap to the wrist.

By InvestorPlace Jul 3, 2012 12:28PM

By Dan Burrows


The scandals, fraud and fallout from the financial crisis just never seem to end, so you might be forgiven if your response to the latest banking bombshell is to throw up in your mouth only just a little bit.


Price-fixing is a crime, but as with every other scandal to emerge from the stupidity and greed that plunged the world into the worst economic crisis since the 1930s, don't expect anyone to go to jail.


Bob Diamond, chief executive of Barclays (BCS), resigned Tuesday, felled by a scandal in which the giant British investment bank rigged interest rates. Other senior management heads are rolling, too.


But as past is precedent, the punishment meted out on Barclays and its executives is a pittance. Barclays is paying a settlement to regulators amounting to $450 million. For a firm that made more than $6 billion in profit on $58 billion in revenue last year, that is something less than a slap on the wrist.


Meanwhile, the disgraced executives walk away several millions of dollars richer. Diamond earned more than $2 million in salary last year and is entitled to six months' salary if he resigns voluntarily.


As for regular folks? They lost their life savings in the market crash. They lost their homes and they lost their jobs. That would have been sufficient. But now that the rate-rigging has come to light, we know they probably were ripped off in countless other ways as well.


It turns out that back in 2007 and 2008, during the darkest days of the financial crisis, Barclays lied about the interest rate it would expect to pay other banks to borrow short-term cash. The bank reported artificially low rates to make it look healthier -- or more creditworthy -- to other banks and the market.


That's a big deal because those banks' self-reports form the basis of LIBOR, or the London interbank offered rate benchmark. LIBOR is used to set rates not just on derivatives and swaps and arcane financial products, but on consumer loans, too.


Indeed, LIBOR is used to figure rates on about $350 trillion worth of financial products like credit cards, mortgages, home loans and student loans. Fiddling with LIBOR distorts prices paid for all manner of consumer credit, meaning lots of people probably were collectively ripped off, even if only by fractions of a percent.


So surprise, surprise: From Wall Street to Main Street, the game was rigged, and it was rigged by shenanigans at a supposedly stellar institution.


Barclays actually was seen as a big winner coming out of the crisis. After all, when Lehman Brothers blew up, it was able to scoop up the best parts of the Wall Street investment bank on the cheap, transforming itself into a major player.


Now the scandal has claimed the bank's chairman, its CEO and its newly minted chief operating officer -- and, of course, its reputation.


More worrisome is that the investigation has spread to other banks, including JPMorgan Chase (JPM), Citigroup (C), UBS (UBS) and HSBC (HBC).


Perhaps the fraud will be found to have been contained to Barclays, and only that firm and U.K. regulators will come out with black eyes. But don't bet on it.


As they say on Wall Street, there is never just one cockroach.


As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.


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1Comment
Jul 3, 2012 10:46PM
avatar
Great article. The cockroaches have been rapidly multiplying since the deregulation era bloomed in the 1980s. And with the eventual elimination of Glass-Steagall act, banks could get into speculation and the bonuses of bank CEOs like Mr. Diamond and JPMorgan's Mr. Dimon skyrocketed. The main problems are:
1) The fines as you point out are always pathetically minuscule. If somebody steals $1000 and you fine them $50, will they keep stealing?
2) The CEOs and the big guys rarely get punished. They don't even have to step down and if they did, they got a nice golden parachute severance package
3) Nobody goes to jail
4) The govt refuses to charge the corporations criminally since this means they have to be shut down like Arthur-Andersen and oh no we can't let that happen because they are 'too-big-to-fail'
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