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Manipulating Libor

I HAVE USED BARCLAYS as lead arranger on two major successful refinancing projects, one in 2007 and another more recently. So I took both a personal and a professional interest in the exposure of the alleged Libor fixing scandal that has already claimed certain well-publicised heads. Along with countless other organisations, my credit facilities are linked to Libor and the interest costs are both variable and dependent upon the integrity of banking practice in setting the daily rate.

It never occurred to me that Libor could be manipulated, but I now believe the system was flawed. One friend, a successful private equity investor, told me that in his first City job he delivered to the authorities at 11am his bank’s daily Libor estimate. There were few checks and balances in the system, but their integrity was absolute and there was no need. However, certain bankers have long been referred to as Banksters, a term coined by Ferdinand Pecora, a lawyer working for the US Senate to investigate the causes of the Great Depression. In fact, Libor was referred to as the “rate at which banks don’t lend to each other” during the 2007 crisis by Willem Buiter, now the chief economist at Citigroup.

My own perception of bankers’ behaviour has been consistent with the ethical standards espoused by JP Morgan Jr, seen in his 1933 quote: “The banker must at all times conduct himself so as to justify the confidence of his clients in him.” Indeed, Bob Diamond was famous for his statement in a BBC lecture of “the importance of culture in establishing the ethos of integrity” and “evidence of culture is how people behave when no one is watching”. I do not blame Barclays, but the system itself, and it may yet emerge that other banks were involved.

Two types of manipulation are evident. The first was in the 2007 era when banks were lowballing Libor rates to show they were not as financially stressed as the market expected. The second was more recent, and an attempt to inflate profits. I do not understand why nobody focused on the emerging variance between credit default swap quotes and Libor. Certain borrowers, myself included, probably benefited from the first but were penalised by the second. So what should we do about it? There is talk of private claims by corporates with Libor-linked contracts, and about 20 global banks are bracing themselves for lawsuits. This may become the banking sector’s Tobacco Moment. There is the issue of the £290m fine against Barclays. As a client and a borrower, I struggle with the logic of this and I know the clients and shareholders will pay this fine, which will add to, rather than relieve, the financial pressures in the banking sector. Alternative punishments and deterrents may be more appropriate.

I have found the Barclays teams to be highly professional, effective and ethical. In my own refinancing projects, they took the lead in assembling large lending syndicates, undertook thorough due diligence, provided insights into the business cases, helped to negotiate complex facilities agreements, and proposed lucrative interest rate swaps/caps/collars and other products to me. I relied on their reputation and integrity, and this helped me with the FSA, regulators and customers. The relationships at a personal level were and remain excellent.

In my experience, many lending banks place unyielding demands for openness and integrity on the FDs to whom they provide loan facilities.

Hence my shock and disappointment at this latest banking scandal as it played out in the media. Were the Libor misdemeanours of a technical nature; were they manipulative of the market; were they widespread; were they of any consequence; were they confined to Barclays?

I can see that we have not yet established the whole story, and we do not know what else we do not know, so I am not in a position to decide what to do about it. ?

Last month the Secret Finance Director attended a lecture by Jonathon Evans, Chief of MI5 at the Mansion House, and was lucky to see the spectacular opening ceremony of the Olympic Games.


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