Global Legal Post, July 2012 – Stephen Gilchrist gives his opinion on the Libor scandal
Hoist by their rigging
20th July 2012
Details of the Libor scandal make most people's heads spin - but one thing is assumed: bankers as a breed are borderline crooks. Stephen Gilchrist looks at whether any will do time for massaging interest rates
Back in the halcyon days of former British Prime Minister Margaret Thatcher, the likes of recently resigned Barclays Bank chief executive Bob Diamond and his subordinates would have been hailed as the financial enlightenment - in Shakespearian terms a 'brave new world"| that hath such people in't'.
Today, Mr Diamond and his ilk are more likely to be regarded, like Caesar, as the 'serpent's egg', a tyrant waiting to be hatched.
At the very least, the London Interbank Offered Rate (Libor) debacle has meant that the working practices of 'traders', 'submitters', and the intricacies of interest rate derivatives, have been reluctantly pushed into the sunlight, away from the narrow, shadowy and fog-filled alleys down which they normally travel.
Libor and its eurozone equivalent, Euribor, are benchmark reference rates that indicate the interest rate that banks charge when lending to each other. They are fundamental to the operation of both UK and international financial markets, including markets in interest rate derivatives contracts.
But most people - many lawyers included - will not be interested in the detail of what has happened, or how it works, but rather take the holistic view that a bunch of crooks have yet again skewed the financial system in their own favour.
Many of those disinterested people may form part of a spider's web of civil suits against those culpable, including shareholder actions and even suits from those individuals (in group actions or otherwise) whose personal circumstances have been damaged. Barclays' breaches of Financial Services Agency requirements - for which the bank was fined lb59.5 million - encompassed several issues, involving a significant number of employees and occurring over several years.
Barclays' misconduct included making submissions that formed part of the Libor and Euribor setting process and that took into account requests from Barclays' interest rate derivatives traders. These traders were motivated by profit and sought to benefit Barclays' trading positions as well as to influence the submissions of other banks contributing to the rate setting process. The bank also reduced its submissions during the financial crisis as a result of senior management's concerns over negative media comment.
The definitions for each of Libor and Euribor are different, but each requires submissions related to funding from the contributing banks and does not allow for consideration of factors unrelated to borrowing or lending in the interbank market. They are also used as benchmark rates for interest rate swaps, potentially affecting hundreds of trillions of dollars in swaps at any one time.
Barclay's derivatives traders sought to influence these submissions by making requests for particular submissions, and evidence was available that the bank's submitters had taken these requests into account. The FSA case focused on breaches of its principles for businesses. No individuals were targeted, just the corporate entity, despite evidence of email traffic between traders and submitters.
Meanwhile, the UK's Serious Fraud Office has confirmed plans to investigate alleged Libor manipulation by other banks. But manipulation of interbank rates has no specific criminal offences associated with it. The 'offence' of market abuse (under the Financial Services and Markets Act 2000) is a civil offence and in any event relates to 'qualifying investments', usually those on the equity markets. The criminal offence of insider dealing is not on the point at all.
The 2000 legislation contains several offences pertaining to misleading statements and practices, but these require an intention to induce another party to enter into a 'relevant agreement' or forego certain rights conferred by a 'relevant investment'. The parameters are straight jacketed and are simply not robust enough to cater for this rate-rigging scenario.
Therefore, the reported view of British Chancellor of the Exchequer George Osborne - that the FSA did not have the power to bring criminal prosecutions - is probably accurate. Mr Osborne said he would look at strengthening the criminal sanctions available to the financial regulators and added the Financial Services Bill could be amended.
For now, however, we are left with the SFO and fraud. Good old fashioned fraud. The UK's Fraud Act 2006 makes it an offence to commit fraud by false representation requiring in essence: dishonesty, the intention of making a gain or causing loss or risk of loss to another, and a false representation.
In this case, the prosecution would need to prove against the individual submitters (who would be need to be identified) - and possibly against the encouraging traders, who could be construed to have 'conspired' to commit the fraud - that they acted dishonesty, made false or deceptive submissions (or representations), with the intent to gain for themselves, or avoid loss for the bank. The burden of proof is on the prosecution to prove a case beyond a reasonable doubt, and not on the balance of probabilities. So what chances of a conviction, let alone a significant penalty?
How far has this virus spread beyond Barclays? Are bankers nominally authorised by the FSA as 'fit and proper' capable of operating within a moral compass, let alone a legal one?
It is not surprising that no senior banker or regulator has been jailed for their roles in the financial crisis. Bankers and regulators live in their own bubble, protected from the ordinary pressures and threats of criminal justice by the politics of economics and the perception that at all costs chaos must not prevail.
What politicians and regulators fear most - entirely without justification - is a breakdown of public order if the economic edifice is seen to be collapsing. From the mouth of King Lear: 'That way madness lies; let me shun that; No more of that.'
Stephen Gilchrist is head of the regulatory law department at London based law firm Saunders Law