–UK’s Serious Fraud Office Launches Libor Probe
–BOE’s Turner Testifies Monday

By Denny Gulino

WASHINGTON (MNI) – As several large international banks, including
a few in the United States, wait for the Libor axe to fall on them, one
question raised is how well bank stress tests can model unforeseen
events. But there are many other questions as well.

Barclays, which claims it fully cooperated with authorities, is
nevertheless paying them nearly a half billion dollars in penalties.
Some other banks, not all of whom have been so cooperative, are waiting
to hear what their penalties will be.

But regulatory penalties are only part of the potential damage, and
perhaps not the most significant part, as the Barclays episode is
demonstrating.

First, there are non-monetary damages, which may in the long run be
the most important. The announced top-level Barclays departures, though
not necessarily as immediate as they first seemed, will deprive that
bank of its top three executives, a decapitation that calls into
question the institution’s continued commitment to its enlarging
footprint in investment banking and several other operational
fundamentals.

The departing executives will not be able to escape the many
further investigations under way nor will Barclays escape their close
association with the bank.

Second, the sheer number of investigations and their distractions
will burden Barclays and any other bank target, perhaps for years.
Earlier Friday the UK’s Serious Fraud Office announced it has agreed to
“formally accept the Libor matter for investigation.” That places the
individual authors of many incriminating emails at Barclays in legal
jeopardy as well as the recipients of the emails at other banks.

If criminal prosecutions follow, for Barclays or any other bank,
their predicament suddenly escalates into an existential threat, since
convictions make bank operations difficult in any country that delivers
them. By definition, the international banks in the crosshairs operate
in many countries.

Barclays dodged the first bullet, getting a two-year exemption from
an institutional indictment from the U.S. CFTC and the Department of
Justice, consideration for the bank’s cooperation in their two-year
probe. There are many more bullets to dodge and some other banks are
doubtless strategizing already how to duck them as well when their time
comes.

Germany’s markets regulator BaFin is deep into its own Libor
manipulation probe as is Canada’s Competition Bureau. With the new
disclosures from the CFTC, the U.S. Department of Justice and UK’s
Financial Services Authority that accompanied the levy of their huge
penalties, investigators worldwide now likely have far more concrete
evidence than before.

Then there is a thicket of civil lawsuits already under way in
several countries. That evidence being gathered by banking regulators,
market regulators and state prosecutors is eagerly awaited by dozens of
law firms, some of which have been pursuing Libor manipulation awards
since 2009.

In the U.S. alone two dozen Libor lawsuits, some invoking RICO
conspiracy charges, have been consolidated in Manhattan’s U.S. District
Court for the Southern District. They have been filed by firms,
municipalities and individual investors claiming losses on securities
with yields calibrated to Libor.

With so much new evidence in the pipeline, many more civil lawsuits
can be expected, particularly in U.S. courts where punitive damages can
be claimed in addition to compensation, not the case in many other
venues.

Bank of England Deputy Governor Paul Tucker testifies Monday before
the UK’s Treasury Select Committee to address Barclays disclosure that
his 2008 telephone call was interpreted by bank managers as the go-ahead
to submit distorted rate information to the Libor process. Barclays’
Marcus Agius testifies Tuesday, not only as chairman of the bank, but as
chairman — up until Monday — of the British Bankers Association, the
banking trade group that supervises Libor.

Standard and Poor’s joined Moody’s earlier in the week when they
changed their outlook for Barclays to negative, to remain until the
company demonstrates its operating stability in the quarters ahead.

Meanwhile, the Libor scandal has placed a new focus on the adequacy
of regulatory stress testing of the largest banks, the latest round of
which was completed in the U.S. in March. With a focus on economic and
financial stress, using hypothetical scenarios limited to adverse
circumstances in the economy and in markets, the exercise completely
misses other kinds of stress, including the loss of top management,
severe reputational damage, massive legal expenses and enormous fines.

** MNI Washington Bureau: 202-371-2121 **

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