July 4, 2012
Michael Lewitt



At first, the announcement that Barclays was paying $450 million to settle charges that it manipulated Libor during the financial crisis seemed like just another minor corporate scandal. After all, it pales in comparison to the $3 billion settlement GlaxoSmithKline entered into this week for the unlawful promotion of prescription drugs. However, Libor – the London Interbank Offered Rate – is used to set interest rates on $350 trillion of dollars and euros of loans and other obligations globally. It is the most basic banking benchmark in the world. At the height of the financial crisis, Libor was viewed by the markets as a key barometer of UK banks’ financial health. The higher a bank’s Libor lending rate, the more fragile its financial condition was believed to be.

Barclays’ admission led to the resignation of the bank’s chairman, Marcus Agius, as well as its high-profile, American-born CEO, Robert Diamond, and others. More resignations (or dismissals) are likely, and criminal indictments in the UK as well as the US could follow. There appear to be mountains of evidence that the conduct in question was intentional and widespread, both within and among major banking institutions in the UK and likely the US. For example, one Barclays banker wrote in a December 4, 2007 email that “[w]e are being dishonest by definition and [are] at risk of damaging our reputation in the market and with the regulators.” The acts in question didn’t happen once or twice. They were not isolated instances. They were not the acts of a few bad apples. As the Financial Times phrased it over the weekend of June 30/July 1, the law was broken “systematically and over a period of many years, both before and after the crisis.” The individuals and institutions involved knew they were doing wrong and did it anyway, repeatedly.

If matters ended there, things would be bad enough. However, it appears that this scandal is much worse. On July 3, in preparation for Mr. Diamond’s July 4 appearance before Parliament, Barclays released documents on its website that implicate the Bank of England, the Financial Services Authority (FSA), and even Whitehall in the scandal. It appears that Paul Tucker, the deputy governor of the Bank of England, encouraged Barclays to lower its Libor bids in an effort to calm market fears about Barclays’ financial health. The probing of the relationship between Barclays and British officialdom is underway as today’s (July 4) Diamond testimony demonstrates.

It is almost impossible to overstate the seriousness of these events or the potential they have to destabilize the financial system. The private sector breaking the law is always serious business, but at least the public sector is supposed to be standing ready to impose punishment and restore order. In this case, however, the global financial markets were subjected to an alleged private-public partnership in an alleged crime. Moreover, the activity involved a benchmark interest rate on which literally the entire world depends. The UK financial sector is now under siege from politicians, as it should be – but that begs the question of who should besiege the politicians and central bankers who were integral to this mess.

The first order of business must be the establishment of a transparent method for setting Libor. The markets must be able to believe that this benchmark interest rate is not being manipulated and is an accurate measure of borrowing and lending costs. There will be more than enough time later to punish the institutions and individuals who betrayed the trust that was placed in them by the world. When that punishment comes, however, it must be harsh and swift.


Michael Lewitt, Vice President and Portfolio Manager, email:

Kotok note: readers must consider that various Cumberland portfolio managers, economists and analysts will be writing about the LIBOR affair over the next period of time. This piece by Michael Lewitt is the first of what are likely to be several writings. The views and analysis are solely based upon what is presently known at the time of publication and may change as more facts come out.

Michael Lewitt is a portfolio manager and heads the opportunistic credit section of Cumberland. His bio can be found at His email is

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