Barclay and LIBOR The Case Solution
Question:3
Traders benefit from manipulating the LIBOR
Let’s see how the traders took benefit from LIBOR rate rigging. An example of plain vanilla is taken in the case $4 million loan interest rate swap. The terms of the deal between Barclay and counter party are such as Barclay has to pay 0.2% plus LIBOR rate and the counter party has to pay 5%. So the amount of interest will be paid depending on the LIBOR rate, and in this case, as Barclay has to pay a floating rate they will take benefit from the low LIBOR rate. So Barclay convinced some banks to submit low rates so that he can come up with a low LIBOR rate to take benefit by paying a low floating rate and getting a high fixed rate from the counter party. The banks also got benefit by showing their competitiveness of charging low as compared to other banks.
Traders benefit from manipulating the LIBOR
The manipulation of the LIBOR rates benefited investors by increasing their yields and helped banks avoid the financial crisis. The traders took advantage of their position in the market to influence rates by submitting inflated Labor estimates. They also manipulated the rate of the prime lending rate with other banks. The manipulation of LIBOR caused the mortgage rates to increase for U.S. homeowners. During the time of the scandal, the LIBOR rates were manipulated in two stages: Greed and Deception.
The evidence of the manipulation was overwhelming. When the LIBOR fell in the first quarter of 2009, the banks reported a dramatic increase in profits. Traders at Bank of America and Citigroup had a huge derivative portfolio tied to the Libor, and the two banks reported massive profits. The researchers analyzed the exposure of banks to the Libor and their earnings. Their findings revealed that the manipulations were very successful. But the lack of transparency is a problem.
The LIBOR is a benchmark interest rate used in hundreds of trillions of dollars of financial instruments. Many banks use this rate to calculate loan rates. The manipulated rate helped banks boost their profits. But the extent of the manipulation is unclear. In the short term, the manipulation of the LIBOR boosted profits in the derivatives market. The IBA, the new administrator of the LIBOR, has already issued its first criminal indictment.
During the time of the financial crisis, the LIBOR was manipulated by traders in the financial industry. As a result, the rate of the dollar was 20 to 30 basis points higher than the normal level. According to a Citigroup analyst, this meant that the rate of the dollar was 20 to 30 percent lower. This manipulation was a major problem for global markets and was the reason why the SFO decided to launch an investigation.
The regulators also investigated the actions of the banks in manipulating the LIBOR. The banks had a policy of setting the LIBOR at their discretion. This practice increased the rate of the Libor. In addition, the bankers had a higher profit margin. As a result of the manipulation, the market was less transparent. In the meantime, the government and the FSA have imposed fines on the bankers.
Traders were not aware that they could manipulate the LIBOR because the British Bankers Association did not have the power to penalize them. As a result, the BBA had little incentive to discourage the traders from cheating. Consequently, the UK government has imposed sanctions on the trading industry. It was a year before the scandal broke out in the UK. Its ban on the LIBOR was overturned on 16 December 2013.
While the bank executives admitted to misreporting the borrowing costs of U.S. banks was not the same as manipulating the LIBOR. In both cases, the trading cost of a country is the same as the cost of lending to the nation. But if the costs of borrowing are high, they might try to hide them. However, the penalties imposed on the banks were not enough to make the trader feel comfortable.
As a result of the scandal, the banks have managed to gain considerably huge profits from the market. The penalties paid to the banks were proportionate to the number of loan losses the banks wrote off each year. The fines were only paid to those traders who had benefited from the manipulation. Traders also sought to manipulate the Libor rate because they believed that it was impossible to move the rate.
Question:4
head above the parapet (credit crisis of 2007-2008)
The term “ head above the parapet” in this means that Barclay is not going to manipulate the LIBOR rate to save itself from further negative publicity. It defines that negative outcome due to the submitting high-interest rate (British) .
Question:5
Relationships between LIBOR rate submitters and traders
The submissions of LIBOR rates are made by banks and financial institutions. The resulting rates are published and used by traders to determine interest rates. The relationship between the rate submitters and the traders is an important factor in determining how rates are set. In 2007, there was a rift between the brokers and the lenders, and the bank's rates were influenced by the monetary policy of other banks.
However, a recent investigation reveals that there was a tangled web of relationships between the rate submitters and the traders who bought and sold the rate. While it is not the fault of individual rate-submitters, it does show that there are several interconnected parties. In 2012, the European Commission announced a record fine of $2.5 billion. The fines came after the banks were found guilty of LIBOR fraud.
The first scandal related to the LIBOR rate occurred in 2008 when Thomas Hayes was arrested. He was one of the first bankers to be jailed for manipulating the rate of the London interbank market. His crimes were a result of a collision between the two parties. He made false statements to the ICE, and he moved to Citigroup after the incident.
It is important to understand that there are multiple relationships between the LIBOR rate submitters and the traders. In the past, Barclays coordinated with other banks to manipulate the LIBOR. In 2008, a settlement between the banks and the Intercontinental Exchange Benchmark Administration revealed that the lenders were conspiring to influence the price of Sterling LIBOR. This was a major issue that impacted Sterling's creditworthiness................
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