The global scam that may prove terminal for Barclays, Lloyds and RBS

By Ian Fraser

IanFraser.org, July 1, 2012: Executives and former executives of the Royal Bank of Scotland, Lloyds Banking Group, HSBC and Barclays are at risk of criminal action, including possible extradition to the United States, in the wake of evidence of their concerted attempts to rig global interest rates, according to senior legal experts.

RBS, Lloyds and HSBC are also facing even larger fines than Barclays’ £290 million fine because of their involvement in the alleged international cartel.

William K Black, an associate professor of economics and law at the University of Missouri-Kansas City, told the Sunday Herald that anyone who is found to have manipulated Libor or condoned such practices at a senior level in a bank should face criminal prosecution. He suggested UK based directors and staff, such as the former RBS chief executive Fred Goodwin, could be liable for extradition to the US.
Black, a world-leading expert on financial crime said:

“The reports of systematic falsification of Libor reports, if accurate, constitute felonies under US antitrust law that should be prosecuted vigorously, as should the systematic cover up.”

The US Justice Department has confirmed its criminal division is investigating banks other than Barclays. It said:

“The Justice Department’s criminal investigation into the manipulation of Libor and Euribor by other financial institutions and individuals is on-going.”

Industry sources said executives from Barclays, HSBC, Lloyds and RBS are at risk of extradition hearings, since evidence suggests that US dollar Libor was was one of the benchmarks that was manipulated. Seventy percent of the $500 trillion global swaps market is based on US dollar Libor, with American counterparties likely to have been most affected.

Labour leader Ed Miliband last week called for the guilty individuals to face criminal prosecutions, saying: “we need the strongest punishment, a change in regulation and a change in the culture of our banks.” UK justice secretary Ken Clarke yesterday insisted bankers who have committed crimes must be brought to trial, as an urgent independent review into the inter-bank lending rate scandal was announced.

Scottish justice secretary Kenny MacAskill said last night that “if the Lord Advocate was so minded [to prosecute bankers], he would have the government’s full support”.

The review, to be set up by the Government next week, will consider how the Libor rate will operate in the future and whether criminal sanctions for manipulation can be introduced. A short, urgent investigation would allow amendment of the Financial Services Bill currently going through parliament, a spokeswoman for the Prime Minister said.

However, Labour leader Ed Miliband dismissed it as a “sticking-plaster solution” and called for a full-scale public inquiry into banking culture and practices. Ministers are considering setting up a separate review into the professional standards of bankers.
Prime minister David Cameron said:

“It’s very important, above all, that government takes all of the actions necessary, holding bankers accountable, making sure they pay their taxes, making sure there’s proper transparency, making sure the criminal law can go wherever it needs to, to uncover wrongdoing, all of these things need to happen.”

Responding to the calls for an inquiry, he added: “Let’s take our time, think this through carefully… That’s what I’m determined to do, and that’s what we will do.”

Bob Diamond, chief executive of Barclays — whose bank was last week found to have systematically lied about Libor rates over a four year period from 2005-09, following the emergence of a string of internal emails that lifted the lid on how its traders cajoled Barclays’ treasury officials into submitting fictitious data to the British Bankers’ Association — has been summoned to appear before the Treasury Select Committee on Wednesday. And Serious Fraud Office investigators are in talks with the Financial Services Authority to investigate possible crimes.

The last time a high-level ‘white collar’ crime was prosecuted in the UK was in 1991-92, when three senior County NatWest executives and one UBS Philips & Drew stockbroker received jail terms after rigging a rights issue for recruitment firm Blue Arrow. But their guilty verdicts were quashed six months later by the Court of Appeal, amid reports of a confidential edict from the government of former prime minister John Major that ‘white collar’ criminals working for large financial institutions should be immune from prosecution in the UK.

Black said that Barclays’ £290m fine is likely to be dwarfed by the civil penalties likely to be exerted by the EU, which raided RBS’s London offices as part of an anti-trust probe into Libor rigging on October 18. He noted that the EU competition authorities have become far more vigorous in their enforcement actions over the last 15 years as their investigations have disclosed that cartels can persist for decades and cost consumers billions of euros in losses.

Black said that the involvement of EU, Canadian and US antitrust regulators is hugely relevant as it means that much bigger penalties than the Barclays fine are in the pipeline. “The damages could be extraordinarily large,” he said.

“The banking authorities are very good at keeping it within the family,” said Black. “Their fines are almost a reward for cheating and theft, since they go towards reducing regulatory fees in ensuing years. As long as it’s with the financial regulators, then you’re going to get comparatively small fines.
“But with anti-trust authorities involved, you have the potential for fines equivalent to very large multiples of the actual losses. The US still has better laws on that than most places. You can get treble damages civilly.”

On Friday, EU competition commissioner Joaquin Almunia confirmed that its anti-trust investigation into alleged Libor manipulation is a top priority.

“We have been looking into possible collusion between banks regarding Libor and Euribor. Whereas the financial authorities are concerned with fraud within banks, we’re looking at possible collusion between financial institutions that should compete with each other. I am deeply worried about what the documents made public may reveal about the conduct of some in the sector.”The EC has draconian remedies to root out anti-competitive practices, including imposing fines equivalent to 10% of turnover in a given market if it finds evidence of price-fixing or collusion. RBS has confirmed it is being investigated by the EC.

Amit Goel, analyst at Swiss investment bank Credit Suisse, expects that other banks found to have fiddled benchmark interest rates will face heavier fines and penalties than Barclays. Goel said: “Reading the statements by the authorities, we expect to get settlements by others in the course of time which could be more punitive.” He implied that RBS and Lloyds are among the banks that are “most at risk” in view of weak controls ahead of their near collapses.
Janine Alexander, associate at law firm Collyer Bristow, said:

“This is likely to result in a large flood of litigation on various fronts between banks, their customers, and other counter parties, relating to products which refer to Libor — since Libor is a fundamental benchmark that underpins a great many obligations. But how it affects residential mortgages is not yet clear.”

Some commentators argue that, since the FSA found only evidence of attempts to distort US dollar Libor and the European Euribor rate – not sterling Libor, which is used to price certain UK buy-to-let, private bank and subprime mortgages – the chances of lawsuits by homeowners are limited. However, Britons with holiday homes are at greater risk of having had mortgage rates set artificially.
However, if it can be proved that sterling Libor was also rigged, the 250,000 UK homeowners with Libor linked mortgages stand a greater chance of successfully suing their bank, especially if they can prove they took out their loans on days when Libor rates were artificially inflated, implying their mortgage was set at too high a rate. People with subprime first and second-charge mortgages whose interest rates rise and fall with Libor and “cost of funding” may also qualify for compensation. Alexander added:

“The full ramifications of this are not yet understood and a lot of lawyers are going to be working over the next few weeks to get to the bottom of how it’s effected their clients’ relations with the bank.”

Cat McLean, partner in Edinburgh law firm MBM Commercial, said:

“We have a number of clients whose commercial lending is linked to Libor, who are considering their positions.”

Both RBS and Lloyds are already named as defendants several of class actions in the US. In one case being heard in the US District Court in San Francisco, lead plaintiff online brokerage Charles Schwab accuses RBS and other banks of violating anti-trust, racketeering and securities laws. Schwab alleges this prevented investors earning the returns they could have been made if numbers had been accurate.

Schwab alleges that the banks involved: ”Surreptitiously bilked investors of their rightful rates of returns on their investments, defendants reaped hundreds of millions, if not billions, of dollars in ill-gotten gains.” The cases are being brought under the Sherman Act, America’s anti-trust legislation, which allows for triple damages. Sandy Chen banking analyst at Cenkos Securities said: “The cost of lawsuits related to the Libor rate scandal will likely dwarf the £290 million fine imposed on Barclays.”
Black said

“my advice to the banks is they should be rushing to settle these things – this is what the banks should be doing because they cannot survive discovery .. If the competition authorities actually found things, if they actually found smoking guns, when they did those raids, the competition authorities, those can all be used in the civil suits.”

Lloyds and RBS are being probed by multiple regulators around the world after allegedly joining Barclays and up to 20 other global banks to distort the core interbank lending rates – Libor (London Interbank Offered Rate), Tibor (Tokyo Interbank Offered Rate) and Euribor (Euro Interbank Offered Rate) in 2005-09.

The rates, which underpin $10 trillion in loans to consumers and companies and $350 trillion in derivatives, are meant to underpin the global financial system but the evidence suggests banks sought to distort them in order to enhance their profitability and to mislead investors.

Several traders have been suspended by Lloyds and RBS as the investigations intensify. Tan Chi Min, a former Royal Bank of Scotland trader based in Singapore, is suing RBS after it sacked him over alleged attempts to manipulate Libor in 2007-11 in order to benefit his trading book. He has argued in court papers that senior management at RBS “were fully aware of this, condoned such conduct” and that he was in no position to manipulate the rate on his own. RBS denies this and continues to fight Tan’s claim.
On Friday, The Times reported that RBS is facing a £150 million fine but an RBS spokesman said:

“The process is not as far advanced as the article suggests and there can be no certainty as to the timing or amount of any fine or settlement at this point. RBS will continue to cooperate with the authorities.”

Matt Taibbi, the Rolling Stone columnist who coined the phrase ‘Great Vampire Squid’ for Goldman Sachs, said:

“Libor manipulation is a crime that robs the public to create bonuses for bankers. By artificially lowering interest rates, the banks caused cities, towns, countries, and other public entities to receive smaller returns on their variable-rate investment holdings. If it turns out that taxpayers end up paying the fine for RBS’s crime of robbing taxpayers, how perfect would that be?”

Some commentators suggest that the sheer scale of the settlements and fines may be enough to kill off players like RBS and Lloyds. In such an instance, governments would struggle to persuade their electorates that the financial institutions were worthy of any further taxpayer funded rescues. Bill Black said:-

No I don’t think it would be conceivable that the government could bail them out on these grounds; I  mean you’re going to struggle to explain to the British public that they’re going to have to bail out the Royal Bank of Scotland because they engaged in a cartel against the interests of people.

An edited version of this article was published in the Sunday Herald on July 1st, 2012