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There’s Something Rotten in Banking July 3, 2012

Bloomberg

By the Editors – Jul 2, 2012

You might have missed the latest bank scandal, the one involving Barclays Plc (BARC), in the hubbub of last week’s U.S. health-care ruling and euro salvage plan.

If so, allow us to fill you in: On June 27, Barclays, the U.K.’s second-largest bank by assets, admitted it deliberately reported artificial borrowing costs from 2005 to 2009. The false reports were used to set a benchmark rate, the London interbank offered rate, or Libor, which affects the value of trillions of dollars of derivatives contracts, mortgages and consumer loans. The bank agreed to pay a hefty $455 million to settlecharges with U.S. and U.K. regulators, and on Monday its chairman resigned.

Chief Executive Officer Robert Diamond, who has agreed to forfeit his bonus, shows no sign of following the chairman out the door. He should. In an apology to employees, Diamond wrote that some of the misconduct occurred on his watch, when he was head of Barclays Capital, the investment banking unit. Diamond was already in the doghouse with investors. In April, 27 percent of shareholders, upset that Barclays had missed profit targets, voted down his $19.5 million pay package.

Heads should roll at other banks, too. Regulators and criminal prosecutors, including the U.S. Justice Department, are investigating at least a dozen other firms to determine whether they colluded to rig the rate. Among them: Citigroup Inc., Deutsche Bank AG, HSBC Holdings Plc and UBS AG.

Bank Bashing

We don’t countenance bank bashing. Nor have we ever called on regulators to bust up big banks. But it’s difficult to defend an industry that defrauds the market with fake interest rate figures, thereby stealing from other banks and customers.

Sadly, the Libor case reveals something rotten in today’s banking culture. We hope the investigations expose the bad actors, lead to jail terms for those who knowingly manipulated the market, and force out the senior managers and board directors who participated in, or overlooked, such conduct.

Why so exercised? In the Barclays settlement documents, regulators released smoking-gun e-mails that reveal the extent of the dirty dealing between bank traders (looking to protect profits and bonuses) and senior officials in bank treasury units (hoping to convince markets that their banks weren’t in financial difficulty). The two aren’t supposed to collude, but it’s obvious that the Chinese walls between them come with ladders.

Libor and its euro counterpart, the Euribor, are benchmark rates determined by bank estimates of how much it would cost them to borrow from one another, in different timeframes and currencies. The banks submit sheets of numbers every weekday morning, London time. An adjusted average of the rates determines the size of payments on mortgages and corporate loans worldwide. The rates also serve as an indicator of the health of the banking system. Because some submissions aren’t based on real trades, the potential exists for manipulation.

A Barclays banker responsible for reporting borrowing rates was told to make the bank look healthier by not revealing that borrowing costs had risen. An e-mail he wrote to a supervisor confirms that he complied: “I will reluctantly, gradually and artificially get my libors in line with the rest of the contributors as requested,” he wrote. “I will be contributing rates which are nowhere near the clearing rates for unsecured cash and therefore will not be posting honest prices,” he continued, referring to rates in the overnight money market.

Derivatives Contracts

At times, Barclays traders sought to affect rates on dates when interest-rate derivatives contracts settled, thus profiting more from trades, according to documents made public by the U.S. Commodity Futures Trading Commission, one of the agencies conducting the Libor probes. Here’s an e-mail about the three- month rate from a senior Barclays trader in New York to the London banker who submitted the rates: “Hi Guys, We got a big position in 3m libor for the next 3 days. Can we please keep the lib or fixing at 5.39 for the next few days. It would really help. We do not want it to fix any higher than that. Tks a lot.”

Bankers submitting rates responded to such requests as if they were routine: “For you, anything,” and “done … for you big boy,” according to the e-mails. Not that the efforts went unappreciated: “Dude. I owe you big time!” one trader wrote to a Libor submitter. “Come over one day after work and I’m opening a bottle of Bollinger.”

Barclays traders also coordinated with counterparts from other banks. In an instant message, one Barclays trader wrote to a trader at another bank: “If you know how to keep a secret I’ll bring you in on it, we’re going to push the cash downwards. … I know my treasury’s firepower … please keep it to yourself otherwise it won’t work.”

The Libor system, overseen by the British Bankers Association, operates much the way it did in the 1980s. Even after the news media uncovered evidence of manipulation in 2008, the bank lobby did little to reduce conflicts or improve the veracity of its numbers. Marcus Agius, the now-departed Barclays chairman, was also chairman of the bankers group — until he stepped down Monday from that role, too. The best solution, as Bloomberg View has advocated, is to end Libor and create a benchmark using data from actual loans, rather than relying on banks to tell the truth about their borrowing costs.

The real tragedy of the scandal is the apparent lack of ethics or self-restraint among the people involved. Following billions of dollars of trading losses at JPMorgan Chase & Co.’s out-of-control London unit, the latest installment of big-bank follies offers yet more proof that the industry shouldn’t be trusted to regulate itself.

 

China cuts rates as global economic crisis deepens June 10, 2012

BEIJING (Reuters) – China delivered a surprise interest rate cut on Thursday to combat faltering growth, underlining concern among policymakers worldwide that the euro area’s deepening crisis is threatening the health of the global economy.

The country’s first rate cut since the depths of the global financial crisis in 2008/09 came after the Federal Reserve’s second highest official made a case for more policy easing in the United States, and followed an emergency conference call on Tuesday by the financial leaders of the Group of Seven industrialized nations to discuss Europe’s debt crisis.

It was followed shortly after by comments from Fed Chairman Ben Bernanke that the U.S. central bank was prepared to take action to protect the financial system and U.S. economy.

“The Federal Reserve remains prepared to take action as needed to protect the U.S. economy in the event that financial stresses escalate,” Bernanke said in prepared testimony to the U.S. Congress.

Marc Ostwald, a rate strategist at Monument Securities in London, said the China rate cut combined with Federal Reserve hints and hopes in markets that Europe will deal urgently with Spain’s banking crisis would support risk assets.

“It will be construed positively particularly in close alignment with what we’ve seen,” he said.

The Chinese cut and Bernanke’s statement stood in contrast, however, to the decision by the European Central Bank on Wednesday to leave rates unchanged and hold off on more stimulus, placing the onus on fighting Europe’s crisis on governments.

The People’s Bank of China, the central bank, cut the official one-year borrowing rate by 25 basis points to 6.31 percent and the one-year deposit rate by a similar amount to 3.25 percent.

The cuts confounded the call of many economists who thought the central bank would refrain from cutting policy rates this year even though policymakers had voiced the need to support growth.

“It’s obviously a very strong signal that the government wants to boost the economy, given the current weakness, especially in demand,” Qinwei Wang, economist at Capital Economics in London, told Reuters.

The European Union is China’s single biggest foreign customer, and faltering demand there has led to worries about the knock-on effect to domestic consumption if industrial activity slows dramatically.

A sudden collapse in global trade in late 2008 saw an estimated 20 million Chinese jobs axed in a matter of months, prompting Beijing to roll-out a 4 trillion yuan ($635 billion) fiscal stimulus plan to bolster domestic economic activity.

While the cut to borrowing costs should help in the near term to shore up an economy on course for its weakest full-year expansion since 1999, the central bank also gave banks more room to set competitive lending and deposit rates to further liberalize China’s financial market.

The rate cut, announced after financial markets closed in Asia, helped shares elsewhere rally. World shares, measured by the MSCI world equity index rose to its highest level in more than a week. The euro rose.

China last changed the borrowing rate in July 2011 when the 1-year benchmark lending rate was raised by 25 bps to 6.56 percent.

GOOD AND BAD

Many world leaders, including in Europe, have been alarmed about the latest turbulence in the euro area debt saga as Spain is fast losing the confidence of financial markets, although it did successfully sell debt on Thursday.

A Greek election this month could also push Athens closer to leaving the bloc.

The problems of Spain’s banks were underlined on Thursday when financial sector sources told Reuters an International Monetary Fund report on Spanish banks next week will show the country’s troubled lenders need a cash injection of at least 40 billion euros ($50 billion).

“We must find ways to deal with this fairly quickly because (Spain) is today the major threat to the world economy,” Swedish Finance Minister Anders Borg told Reuters.

After the G7 call this week, Japan’s Finance Minister Jun Azumi said the grouping shared the view that it should work to ease financial market worries ahead of a G20 meeting in Mexico later this month, where Europe is likely to top the agenda.

Janet Yellen, the Fed’s vice chair, warned on Wednesday of “significant” risks facing the economy.

“Hence, it may well be appropriate to insure against adverse shocks,” she said in remarks before the Boston Economic Club.

Several countries, including China and India, have seen economic growth take a hit this year as the euro zone crisis has hurt global confidence. Several euro area countries are struggling with recession.

Britain is among them, but better than expected economic data allowed the Bank of England to hold off on any new stimulus on Thursday

China’s policy announcement on Thursday meanwhile raised concerns for some that the rate move is pre-empting grim news in a deluge of China data due over the weekend that will include all of the country’s key barometers, such as investment and industrial production.

“The concern is that with industrial production and CPI data coming out of China at the weekend, that it’s indicative of them

knowing something about weak data going forward,” said Adrian Schmidt, currency strategist at Lloyd’s Bank in London.

The PBoC has cut bank reserves for the biggest banks by 150 basis points from a record-high of 21.5 percent in three moves since November, after a two-year tightening campaign to rein in inflation and cool steaming economic growth.

That has freed an estimated 1.2 trillion yuan ($190 billion) for new lending, as Beijing sought to stimulate economic activity without resorting to a major fiscal spending package like 2008’s initiative.

Beijing is still tackling the after-effects of that program, which triggered a frenzy of real estate speculation, saw local governments amass 10.7 trillion yuan of debt, and drove inflation to a three-year peak by July 2011.

(Additional reporting by Koh Gui Qing and Aileen Wang; Editing by Neil Fullick/Jeremy Gaunt)