Barclays Scandal: Libor

From Amanda Chua, Financial Manager To Sir David Walker, Chairman of Barclays Plc. Date 24th February 2013 Subject Implication of The Recent Libor-Fixing Scandal for Barclays Bank 1. Executive Summary * The London Interbank Offered Rate (Libor) is the average interest rate charged to banks for lending funds in the interbank market (Investopedia n. d. ). * The UK Treasury reported that Libor is responsible for an estimated $300 trillion worth of financial transaction (BBC 2012). Barclays’ traders submitted inappropriate rates upon derivative traders request (FSA 2012). * Barclays’ submitted inappropriate rates to prevent negative media attention (FSA 2012). * Barclays was fined ? 290 million for Libor scandal (Wilson 2012). * Former Chairman, CEO and COO resigned in July 2012 (BBC (B) 2013). * Barclays’ share prices fluctuated due to Libor Scandal (Fletcher 2012). * Pursuing profit maximization, Barclays inevitably exploited its stakeholders (MBA Knowledge Base n. d. ). Financial managers think solely for the purpose of profit maximization for the shareholders as it lose focus, carrying out unethical behaviors to gain short-term gratification. * Barclays is suggested to create shareholder value by combining a well-thought-of goal with focused financial planning that will deliver returns to shareholders but in an ethical manner that is acceptable by the society (Barclays Boss Lays Out Revival Plans, 2013). * Installation of more advanced surveillance devices further enforces plan as employees are monitored closely in efforts to control the wellbeing of the workers (Roland 2013). Barclays is suggested to form a neutral ring-fenced rate-setting unit to monitor the rates submission (Daniels 2013). 2. Libor: Explained The London Interbank Offered Rate (Libor) is the average interest rate charged to banks for lending funds in the interbank market (Investopedia n. d. ). Major banks in London who are under BBA submit the rate they presume they will have to pay for borrowing funds from another bank to Thomson Reuters, who will then discard the four lowest and highest rates and use the emainders to calculate the average, resulting with the Libor rate (Kiff 2012). The importance of Libor It is used as the benchmark for interest rates around the world (Surowiecki 2012). The UK Treasury reported that Libor is responsible for an estimated $300 trillion worth of financial transaction (BBC 2012) such as mortgages, corporate loans and derivatives (Surowiecki 2012). Also, Libor acts as a barometer for the welfare of the volatile global financial market (BBA n. d. ). 3. Barclays’ mistakesEmployees at Barclays submitted lower than actual predicted rates to Thomson Reuters (Murray-West 2012). Why it was done Derivative transactions made use of the Libor rate. Hence, the fluctuation of the rates would influence the profit gained for the traders (Surowiecki 2012). Both the traders and rate submitters cooperated through frequent intera ction (Surowiecki 2012) as traders requested for lower rates because they would benefit by paying less for the interest charged on the derivatives.Barclays submitted lower rates to conceal the trouble state it faced during the 2008 credit crunch (Murray-West 2012) when initially their submitted rates were higher than other banks (Bischoff & McGagh 2013). Lower rates prove that banks intending to lend funds to Barclays were assertive of their financial health, because the less assurance a bank had for another, the higher the rate charges will be (Bischoff & McGagh 2013), and Barclays expressed the contrary to conceal their financial instability.It was said that Bob Diamond, then chief executive officer of Barclays, was contacted by Paul Tucker, the deputy governor of the bank, concerning the recurrent greater rates amongst other banks, which worried Diamond who conveyed the news to Jerry del Missier, then chief operating officer, who misinterpreted the news as a command to rig the ra te (Bischoff & McGagh 2013). How it was done. It was effortless to manipulate the rates because they are derived from estimates rather than calculated values (Eavis & Popper 2012).Also, interbank borrowings were reduced during the financial crisis causing difficulty in evaluating whether submitted rates were realistic (Wheatley 2012). 4. Consequences for Barclays’ scandal Manipulating the Libor rate is intolerable and investigation involving the FBI is a reputational damage in itself (R. D. 2012), not only towards Barclays but in the banking sector as a whole where regulators are still speculating which other banks were involved (Bischoff & McGagh 2013). Barclays received a total of ? 290 million penalty from FSA, CFTC and DoJ (R. D. 012) for manipulating the Libor rate. Furthermore, former Barclays’ chairman, Marcus Agius resigned on July 2nd 2012, followed by Bob Diamond and Jerry Del Missier on July 3rd 2012 as a result for their involvement in the LIBOR scandal (BB C (B) 2013). Similarly, 3700 employees were discharged to reorganize the Barclays banking regime (McGee 2013). As Libor accounts for $300 trillion worth of financial transaction, this affects many because lenders lose out as the borrowers benefit from the low interest rate charges and people are very disappointed at the extend to where Barclays has went to.Due to the scandal, Barclays’ share prices fluctuated because the market expected charges for lawsuits against Barclays and it reflected the reputational damage Barclays has encountered for its involvement in the scandal (Armour, n. d. ), though this has caused an overhaul in Barclays that resulted in the increase of share prices months after. Moreover, investment firms and municipal government who fell victim to the Libor scandal due to the buying of bonds or signing of contracts demanded reimbursement from Barclays and will inevitably elicit legal actions (Bloomberg News 2012). 5. Role of Financial ManagementProfit maximi zation is the goal of financial management (Hillier et al, 2011) indicating that its objective is gaining greatest profits by using all possible resources irrespective of the consequences or underlying risk (O’Farrell n. d. ). This is seen as Barclays’ traders tried to maximize profits for their own benefit as well as their stakeholders. Shortcomings of Profit Maximization During the financial crisis, banks were financially unstable, they refused to borrow one another funds because of the low confidence they had for one another, seen through the Libor ratings that were previously submitted before the Libor rigging scandal.Barclays chose to conceal its proper Libor rates that would have indicated its troubled state to the public. This was second by the fact that a firm who pursues the goal of profit maximization will inevitably exploit its workers and consumers, which exemplify an unethical way of carrying out a business resulting from its corrupted practices (MBA Knowl edge Base n. d. ). In Barclays’ case, this was shown by its objective to save the bank’s reputation by finding means to profit maximize to avoid possible outcomes of failure.Jerry’s assumption of Bob’s instruction to fix the Libor rate when it was unfavorable (Bischoff & McGagh 2013) is another illustration of profit maximization gone wrong when financial managers think solely for the purpose of profit maximization for the shareholders as it diverge its actions by carrying out unethical behaviors to gain short-term gratification. Barclays has neglected possible risks because they were too focus on profit maximization as they rigged the Libor for the past years. Risk ignorance is another flaw of profit maximization (eFinance Management n. . ) because firms tend to be shortsighted towards maximizing profit they deserted their morale. This is shown by the reputational damage as a consequence of the scandal. Lastly, the disregard of quality is a shortcoming ( eFinance Management n. d. ) shown through Barclays’ scandal because Barclays obsessed over profit maximization, it neglected the goodwill of the bank. Barclays being a world-renowned bank that was earned through the years overlooked its goodwill as an asset as it rigged the Libor rate to earn short-term profits. . Summary It can be concluded that Barclays’ manipulation of the Libor rate was unacceptable. However, they have taken full responsibility over the consequences. It is suggested that Barclays make an overhaul in its management by changing its mentality from a bank that gravitated its goal on profit maximization to prioritizing an ethical environment before its success (Mcgee 2013) through removing workers incapable of committing to the revised goal (BBC (A) 2013), as this will be a long-term change. (Waldie 013) Antony Jenkins, the new Barclays CEO mentioned in Barclays Boss Lays Out Revival Plans (2013) that Barclays was previously too shortsighted as well as being too aggressive and self-serving. Nonetheless, the current damage helps Barclays to learn from experience. Presently, it is advice to create shareholder value by combining a well-thought-of goal with focused financial planning that will deliver returns to shareholders but in an ethical manner that is acceptable by the society (Barclays Boss Lays Out Revival Plans 2013).Installation of more advanced surveillance devices further enforces this plan as employees are monitored closely in efforts to control the wellbeing of the workers (Roland 2013). Lastly, it is suggested to form a neutral ring-fenced rate-setting unit to monitor the rates submission (Daniels 2013) in Barclays and this combines with trainings that shall be implemented to nurture an ethical and systematical way of setting the Libor rate. This plan aids by applying a team submission rate rather than an individual’s whereby rates submitted will be relatively reliable. BibliographyACTUELNEWSCHANNEL. 2013. Barcla ys Boss Lays Out Revival Plans [online]. [Accessed 22 February 2013]. 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