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Libor Was Whatever Barclays Wanted It To Be

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Good lord are these Barclays settlements juicy. Basically every day for two years one Barclays trader or another would send an email to their Libor submitter saying "hey let's commit crimes, tons of crimes, hahahaha" and then they did. In pathetically colorful language:

Trader C requested low one month and three month US dollar LIBOR submissions ... “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”. A Submitter responded “Done ... for you big boy”.


on 5 February 2008, Trader B (a US dollar Derivatives Trader) stated in a telephone conversation with Manager B that Barclays’ Submitter was submitting “the highest LIBOR of anybody [...] He’s like, I think this is where it should be. I’m like, dude, you’re killing us”.

Or tons more, but I found this one particularly poignant:

Submitter: “Hi All, Just as an FYI, I will be in noon’ish on Monday [...]”.
Trader B: “Noonish? Whos going to put my low fixings in? hehehe”
Submitter: “[...] [X or Y] will be here if you have any requests for the fixings”.

Like ... Trader B was kidding right? I mean, in this one single case? He was making a joke about how he was constantly asking for low fixings and the submitter took him seriously? When you joke around about committing fraud and people take you seriously, that's maybe a sign you should stop committing so much fraud.

And did Barclays ever commit fraud. Its Libor and Euribor submitters - who contribute to poll-based interest rates that set the rates on pretty much all the loans and swaps in the world - based their submissions based not only on the actual question they're asked (roughly "where could you borrow money unsecured today?") but also on other factors like (1) whether Barclays' derivatives traders would profit from a higher or lower Libor and (2) whether Barclays' management would prefer people to think that it could borrow cheaply during the financial crisis (answer: it would). These factors are the wrong factors. The right factors seem to be (from the CFTC settlement):

Barclays' U.S. Dollar LIBOR submitters based their daily submissions on certain market information, including, but not limited to, the following: (1) cash transactions that had taken place in the London U.S. Dollar money market and Barclays' ability to obtain funds in reasonable size at those rates; (2) market information obtained from London interdealer brokers, i.e., voice brokers, overnight financial news, and/or internal Barclays research documents; (3) central banks' decisions with respect to interest rates; (4) prior LIBOR submissions by Barclays and other panel banks; and (5) expectations of Federal Open Market Committee decisions regarding interest rates. After considering these factors, the Barclays' U.S. Dollar LIBOR submitters determined a rate figure for each tenor and entered it into a spreadsheet for submission.

All in Barclay's is paying about $450mm worth of fines to the CFTC, the DOJ and the FSA. One pastime might be figuring out how much they made with this; there are several references like this:

Senior Euro Swaps Trader: "i have a huge 1m fixing today and it would really help to have a low 1m tx a lot."
Euribor Submitter: "I'll do my best."
Senior Euro Swaps Trader: "because I am aware some other banks need a very high one ... if you could push it very low it would help. I have 50bn fixing."

A €50bn 1-month fixing means that every basis point is worth about €417k, meaning that if they shaved one basis point off 1m Euribor then they made about 1/1,000th of their fine right there. And they were doing this intensely from mid 2005 to fall 2007, and sporadically thereafter, in various tenors and currencies, so ... it's quite possible that they made more money on this manipulation than they paid in the fines.

Certainly they cost more money than they paid in fines. You get a lot of leverage in your Libor fixing fraud: sure you save €416k on your €50bn fixing, but you manipulate a kajillion dollars worth of fixings that you have nothing to do with. The CFTC order mentions $350 trillion of OTC swaps, $10 trillion of loans, and $437 trillion of CME eurodollar contracts indexed to Libor alone. Let's do some fake math:

So on that math Barclays caused almost five billion dollars worth of price distortion with its fake Libor submissions; those fines are nothing.

But take those numbers with a grain of salt, and not only because I just made them up.* One lesson that you can't avoid drawing from these emails is that everyone else was doing it too. That one above - "I am aware some other banks need a very high one" - but others too:

"I have a huge fixing on Monday ... something like 30bn 1m fixing ... and I would like it to be very very very high .... Can you do something to help? I know a big clearer will be against us ... and don't want to lose money on that one."

Sometimes Barclays convinced other banks to go along with its plans, but clearly sometimes it was shooting against other banks.** One reason not to get over-excited about the Libor scandals is that there seems to have been, roughly speaking, a two-sided market: some banks wanted Libor too low, some wanted it too high, so maybe it ended up just about right. Maybe. With notable exceptions for the depths of the financial crisis, when everyone wanted to look like they could borrow cheaply (or at all), at which point Libor manipulation served as back-door monetary easing? I guess? They should be rewarded, not fined? Meh.

Besides the two-sidedness of the fraud partially cancelling out, there's perhaps another reason that the CFTC and FSA settled. What the heck is Libor anyway? Look at those criteria that the CFTC half-endorsed: the submitter was supposed to consider things like central bank decisions and "prior LIBOR submissions by Barclays and other panel banks" in making its submission, rather than just looking for objective measures of where Barclays could borrow money that day. That makes sense, of course, since Barclays wasn't in the habit of borrowing in all of the currencies and tenors of Libor every day and so had to do a certain amount of guessing - but I submit to you there were a whole lot of days where expectations about future FOMC decisions (or prior JPMorgan borrowing rates) were not uppermost in the minds of those considering lending money to Barclays. But once you're on board with the fact that Barclays' submitted was guessing in the best of circumstances, it's harder to argue that biased guessing is "manipulating a commodity" as opposed to just picking a different number out of thin air. That might be a stumbling block for regulators taking this case to court, making them willing to settle. And it's easy to see why Barclays wanted to settle - getting all those emails quoted in a settlement is embarrassing, but nothing like as bad as getting them read in court.

CFTC order
FSA order
Barclays Fined $453.2 Million for False Libor Submissions [Bloomberg]
Barclays pays $450m to end Libor probe [FT]
LIBOR manipulation? Done for you, Big Boy [FTAV]

* The typical wrongness does seem to have ranged from around half a basis point to a little over a basis point, e.g. "I am going to go 78 and 92.5. It is difficult to go lower than that in threes. looking at where cash is trading. In fact, if you did not want a low one I would have gone 93 at least." Dividing by 18 to show the effect is a bit of a fudge - BBA actually throws out the top 4 and bottom 4 of the 18 submissions, and Barclays regularly tried to get kicked out, so it's not as linear as that, but whatever. And of course they weren't doing it every day in every currency and tenor (and every contract doesn't reset every day etc.) - but the CFTC hints they did it close to daily at times, in 1m and 3m Euribor and USD Libor, which probably make up the bulk of that $360 trillion of loans and OTC swaps and all of the $437 trillion of eurodollars.

** Either way, though, expect more fines.