LIBOR Scandal Hits Barclays

by Kevin D. Freeman on July 7, 2012

No one really wants to believe that economic warfare or financial terrorism is real. The arguments that line up against the concept essentially boil down to the following:

1) Markets are too big to manipulate.

2) People would never want to hurt the American economy because they would be hurt in the process.

3) Terrorists and/or other nations are too stupid to figure out how to hurt us economically.

We have systematically dismantled these arguments in our book SECRET WEAPON (http://secretweapon.org), this Blog, and our other writings and media appearances. The bottom-line truth is that markets can be manipulated, that whatever you can do for a profit can be done for other motives, that some people are motivated by things other than money, that the United States is not invincible, and that there are plenty of people who not only know how to destroy us but are actively working to do so.

This past week, the LIBOR scandal popped back up with Barclays bank at the center of it. We have reported on LIBOR before (https://globaleconomicwarfare.com/2012/02/they-said-it-couldnt-be-done-but-market-manipulation-is-real/). Our conclusion then remains true today. Markets, even big ones can be manipulated. The twist of Barclay’s involvement adds a new dimension, however. LIBOR stands for London Inter-Bank Offered Rate. It is a base interest rate for hundreds of trillions of dollars in loans. It is supposed to represent the rate charged from one bank to another as reflective of the best available private-sector rates.

Here is the headline and a brief synopsis:

Prepare For ‘Battle Royale’ Over Libor Scandal

LIBOR, BARCLAYS LIBOR, LIBOR SCANDAL, POLITICIANS LIBOR, BRITAIN, UNITED KINGDOM, GEORGE OSBORNE, U.K., PAUL TUCKER

Posted By: Catherine Boyle | Staff Writer, CNBC.com

| 04 Jul 2012 | 07:24 AM ET

The rapidly developing row over manipulation of inter-bank lending rates is turning into a battle over the future of banks around the world, analysts and politicans have warned.

“This is turning into a battle royale between 20 banks and potentially the Bank of England and other central banks,” Dan Conaghan, author of The Bank – Inside the Bank of England, told CNBC Wednesday.

“This is really about orderly markets and the relationship between commercial banks, investment banks and the central bank. The central bank has to decide if it’s above the market or intimately involved with it.”

The scandal over artificial lowering of the London interbank offered rate (Libor ) has already claimed two high profile scalps at Barclays, Bob Diamond, the bank’s chief executive and Jerry del Missier, its chief operating officer.

Here are some other Barclays/LIBOR headlines:

LIBOR Banking Scandal Deepens from Rolling Stone.

Amidst Libor Scandal, Bob Diamond Feared Barclays Would Be Nationalized by Forbes. This article has a very interesting quote that needs to be considered. Some have argued that the UK government was pressuring Barclays to falsely report LIBOR to make the system seem solvent. What this Forbes article says is that Barclays may have been manipulating LIBOR to lock up investments from two Middle Eastern Sovereign Wealth Funds:

On July 4th of all days, the American-bred banker Bob Diamond has revealed that one of his big fears during the 2008 global credit crisis was that his bank, Barclays, would be taken over by the British government. The former CEO of the U.K. lender gave his testimony under questioning today from British MPs, who were trying get to the bottom of how and why traders at Barclays had manipulated Libor, a key lending rate between banks that underpins a multi-trillion dollar market for financial products, from late 2008 onwards.

The questions were focused on a note that Barclays released yesterday, which Diamond wrote after a key phone conversation with Bank of England deputy governor Paul Tucker, on October 29, 2008. In it, Diamond said Tucker had told him there were concerns among “senior figures within Whitehall” — Whitehall referring to the British government or, more specifically, its civil service — about Barclays’ Libor rate, which was at the “top end.”

Barclays released the note yesterday, leading to a flurry of questions about whether Tucker essentially gave Diamond a “wink and a nudge” to help keep Libor low, and the country’s banking system operating more smoothly at a tumultuous time for global markets. The answer seems to point more towards Diamond’s attempts to protect Barclays’ interests in a looming deal with Middle Eastern investors.

BREAKING: Barclays Revealed Libor Scandal Four Years Ago from Bloomberg.

Barclays, you will recall is the bank that rejected the purchase of Lehman Brothers in September 2008 (from the NY Sun):

Lehman Files for Bankruptcy Protection

By VINNEE TONG and JOE BEL BRUNO, Associated Press | September 15, 2008

Lehman Brothers, a 158-year-old investment bank choked by the credit crisis and falling real estate values, filed for Chapter 11 protection in the biggest bankruptcy filing ever…

Lehman’s last hope of surviving outside of court protection faded yesterday after British bank Barclays PLC withdrew its bid to buy the investment bank.

That rejection set off a chain reaction of failure that cemented the global collapse (from 60 Minutes):

April 22, 2012 7:03 PM

The case against Lehman Brothers

(CBS News) It’s hard to overstate the enormity of the 2008 collapse of Lehman Brothers. It was the largest bankruptcy in history; 26,000 employees lost their jobs; millions of investors lost all or almost all of their money; and it triggered a chain reaction that produced the worst financial crisis and economic downturn in 70 years.

The following script is from “The Case Against Lehman” which originally aired on April 22, 2012. Steve Kroft is the correspondent. James Jacoby and Michael Karzis, producers.

On September 15, 2008, Lehman Brothers, the fourth largest investment bank in the world, declared bankruptcy — sparking chaos in the financial markets and nearly bringing down the global economy. It was the largest bankruptcy in history — larger than General Motors, Washington Mutual, Enron, and Worldcom combined.

After rejecting a merger deal designed to save Lehman Brothers (as Bear Stearns had been saved earlier averting a market collapse), Barclays then buys the Lehman assets out of bankruptcy for pennies on the dollar. Barclays gets such a good deal that auditors force the firm to “mark up” the value a few months later (something pretty rare for a bank in the midst of a global financial meltdown):

Lehman acquisition gains push BarCap to full-year profit

Vivek Ahuja and Harry Wilson 09 Feb 2009 Updated at 12:32 GMT

Gains from Barclays’ acquisition of Lehman Brothers’ North American business helped the bank’s investment banking division to a £1.3bn (€1.5bn) profit in 2008, despite being hit by billions of pounds of losses as a result of the global financial crisis.

Barclays Capital reported a £2.3bn pre-tax gain (nearly $4 billion USD) from its acquisition of Lehman Brothers as the UK bank marked up the value of the US investment bank’s operations as well as writing up the value of assets held by the business.

In fact, the deal is so amazing that Lehman creditors sued (unsuccessfully) to get some money back from Barclays. The deal is so good that Barclays has sufficient capital on their books to allow two Middle East Sovereign Wealth Funds to pull money out even as most banks were scrambling for investors in 2009. First Abu Dhabi pulls out a $2.5 billion profit (from Forbes):

Bye Bye, Barclays

Vidya Ram, 06.02.09

Abu Dhabi investor makes an estimated $2.5 billion selling its stake in the British bank.

07/06/2012 4:00PM ET
LONDON – Barclays‘ once helpful Middle Eastern investors have fallen out of love with the British bank. The investment vehicle of the Abu Dhabi royal family announced Tuesday that it was placing around 1.3 billion shares of Barclays, along with 1.5 billion pounds ($2.5 billion) of capital notes, so that it could spend its money instead on energy investments. It is walking away with at least a 1.5 billion pounds ($2.5 billion) in profit, according to one analyst’s estimate.

Next, Qatar pulled out $1 billion:

Qatar pockets $1 billion from Barclays bail out

Qatar Holding has cleared a cool $1 billion profit selling shares in Barclays Plc…The trading company, an arm of the Doha-based sovereign wealth fund Qatar Investment Authority, sold more than 379 million Barclays shares at 360 pence each…Barclays raised more than 5 billion pounds from Middle Eastern investors last year, triggering criticism from shareholders including Legal & General Group Plc who weren’t first given an opportunity to buy new stock.

There is a big debate as to why Barclays didn’t buy Lehman outright which might have helped avert a global collapse. The common theory supported by Hank Paulson is that the UK government rejected the deal. The UK government is actually on record as saying that it would have required a shareholders vote. Interestingly, the primary shareholders who would have had to approve a deal were the ones that pulled out so much money in early 2009. And, the UK government didn’t have that much of a say because Barclays was the only major bank in the United States or United Kingdom not required to take TARP funds or the British equivalent. If they did take government funds, the two Middle Eastern funds would have gained 55% control (from the UK Telegraph):

Barclays may lose control to Gulf investors

Government dismay as state bail-out plan hamstrung by capital-raising clause that saw Gulf investors pump £5.3bn into bank.

By Louise Armitstead  and Philip Aldrick  21 Jan 2009

The Government is in talks with Barclays after the bank admitted that raising  extra capital could trigger a clause that would deliver control to its Middle East investors.

Government insiders were last night reeling at the possibility that helping  Barclays could see Britain’s fourth biggest lender automatically delivered   to the Middle East as the result of a little known clause . . .

Such a move would   hand the Arab investors around 55pc of Barclays, effectively giving them  control. With the warrants for an additional £3bn of “reserve capital instruments”, their combined stake could rise to 67pc.

One insider said: “This was a clause to protect the Middle East. There seems to have been no thought about protecting the bank at all. If the  clause is triggered at this level, the Middle East can lay claim to the whole bank.”

Now, consider the fact that Barclays was also a major force in paving the way for Shariah Compliant Funds to be able to short sell stocks like banks. This was made public in an August 2007 article in The Wall Street Journal.

Then, there is also that much of the short selling of the banks appeared to be coming from London and the Middle East?

The bear raids on the banks and brokers were NOT a case of piling on by US based hedge funds. And from what he was seeing and hearing about in terms of order flow, the vast majority of the financial short selling the past week or so were being done overseas. It appears that the lion’s share of shorting was coming out of overseas bourses such as London and Dubai. It may not be a coincidence that the financial short selling ban is both here and in London. Then there is another coincidence: The huge increase in shorting of the financials occurred on the anniversary of 9/11. And on top of that, the same institutions attacked on 9/11/01 were the ones suffering in recent days.

Now, we see that Barclays was involved in the LIBOR rate fixing scandal and that senior leadership has been forced to resign. The LIBOR scandal is proof that even big markets can be manipulated.  It can be argued that the manipulation of LIBOR was an attempt to help calm the markets in the midst of the crisis but there were other motives as well. All of this is very complicated and these dots don’t connect in straight lines. But, we see Barclays name show up on a number of puzzle pieces related to the 2008 collapse. and an interesting picture is beginning to emerge.

It is clear that Barclays was involved in manipulating the enormous LIBOR market. It seems that part of their motivation in manipulating LIBOR was to attract Middle Eastern money. In 2007, Barclays helped create a mechanism by which Shariah Compliant funds (including Middle East Sovereign Wealth Funds) could short sell stocks including banks. Lehman Brothers collapsed under massive short interest, much of which appeared to come from the Middle East through London in September 2008. At that same time, Barclays rejected saving Lehman and the global financial system suffered. Barclays, however, profited by buying Lehman assets at fire-sale prices after Lehman declared bankruptcy. And, Barclays was effectively controlled by Middle Eastern interests . . . so much so that the bank could not take UK bailout money without giving the Middle East firms full control. Finally, those Middle East investors profited nicely from their Barclays holdings. While this is not conclusive, it does indeed indicate a troubling pattern of behavior connected to the worst financial crisis since the 1930s. It is certainly sufficient to justify a more thorough examination of the risks of financial terrorism and economic warfare.

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