Barclays and LIBOR Scandal

Case Study

Isaiah Hux

BUS 5440 Financial Management

Florida Institute of Technology

1. Who is hurt and who benefits from the manipulation of LIBOR?

The manipulation of LIBOR impacted many areas, but with this case specifically, the
bankers or traders at other banks were benefiting the most by rate manipulation depending on
their situation. Banks wanted to increase their own profits so they wanted the rates to seem
less risky and more attractive as well as making themselves seem financially stronger.
Barclays was the prime example or catalyst that led this deceptive venture so they were
benefiting at first. Since we do not know what the actual rates were supposed to be, it is
difficult to say who benefited the most, but it is more clear who would be hurt the most. As
the rates trickle down the pipeline, it will ultimately hurt individuals, businesses and other
large financial institutions. People trying to take out a school loan or getting a good APR on
a credit card for example will be altered if the company offering this has rates that have been
altered or falsified as well. If the global interest rate is affected, then the end user will
ultimately be affected.

2. Who was most responsible for the manipulation of LIBOR?

Multiple parties were responsible for this manipulation, just as multiple parties get affected
by this manipulation, but Barlcays did play a major part. Barclays did acknowledge the
wrongdoing, but other employees were also recorded saying that all the panel banks were
submitting rates that were too low. The CEO was accused of having known about the
falsified submissions and that it happened under his direct leadership, but he denied that.
However, in 2008, Barclays was one of the first banks to admit wrongdoing and came forth
to pay for it so eventually the head came to a surface.
The derivative traders as well as the desk could be the ones that are most accountable for
LIBOR, but not the only ones. Senior traders and management was also involved and did
nothing about it.

3. As a leader, how should you respond when you know that your competitors are cheating?
How should you respond when you think regulators are asking you to cheat?
 As we know, this world is full of liars and cheaters and many of whom never get caught. So,
if you have the knowledge that your competitors are cheating and can prove it, I would not
only suggest reporting it, but I would implore it. Even if you feel it might not be hurting
anyone, it is not realized until much later how it negatively impacted other areas. As a leader,
you are depended on to act responsibly and in the best interests of the company. If you see
something, it is a moral obligation to say something. Plus, if you are personally working as
hard as your competitors then why should they get a free leg up? I would not be aggressive
towards a competitor, but I would look up the proper actions to take.

As a leader, you have people looking up to you and following you to make the right
decisions, so as the saying goes, you need to practice what you preach. If you continually
talk about ethics, integrity, and fair practices, then you need to hold yourself accountable
when someone is asking you to cheat, no matter who it is. Being in a higher position of
power, a person should be held to a higher standards and be a good example.
In both instances, cheating the system in anyway, especially in this industry, affects
everyone, no matter who is directly involved in the beginning. Things catch up in the long
run and there is no shortcut to success.

4. What is your assessment of the efforts to fix LIBOR? What, if anything, would you do
differently?

There were reforms put in place, but these should have been deployed earlier when their were
first signs of concern with the LIBOR. Things should have not been overlooked or ignored when
first noticed. The FSA and other regulating bodies identified the lack of quality control
procedures within Barclays teams. They made suggestions to improve their control systems and
strengthen its compliance so fraudulent submissions would be prevented. The FSA seemed to
have a good layout for UK business policies which uses verbiage such as “must” instead of
suggestive type language which I would mimic. The reforms that were adopted use the verbiage
“should” which is more suggestive and do not seem as strict. I feel something that could be put
in place to help is stricter auditing procedures altogether.

5. Compare and contrast the LIBOR scandal and the subprime mortgage meltdown.

Barclays manipulated Libor downward by telling Libor calculators that it could borrow

money at less expensive rates to make the bank appear less risky and more affordable.
This was manipulation making it to appear to have low rates for borrowers and then LIBOR
banks were making a large profit because of securities being rated low. Plus people who
were involved or supposed to be managing things ethically and regulating transactions were
acting irresponsibly and acting in their own personal interests. The subprime mortgage
situation was similar with brokers or employees acting unethical as well. They did not care if
people were going to default on their mortgage, they only wanted to receive their
commission in the beginning of the process. The regulations for borrowers were also dropped
or made more lenient so people with lower credit could still purchase a home. This was
problematic because not enough due diligence was performed to ensure the financial status
of the borrowers, like their income. There needed to be more regulation and quality
 assurance, and after reading this case, it seems similar in that area as well. Until they put
tighter reforms in place, it seemed like things were optional or suggested instead of
mandatory. Manipulation took place in both instances with the deception of loan rates
making things seem less risky and more advantageous.

References:
Rose, C. S., & Sesia, A. (2014). Barclays and the LIBOR Scandal. Harvard Business School, 1-
22.