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Question:

Discuss about the LIBOR Rate Manipulation In US.
 
 

Answer:

Introduction

Barclays plc was accused of setting the interest rate of the Libor in the US, which was higher than the other panel banks. It was against the ethical leadership to use the power to create imbalance in the financial markets. The company was charged with fines from the UK regulators and even from the US Department of Justice (Treanor, 2016).

Voidance of Business Principles

Financial services authority (FSA) is a key regulator of Barclays that observes the LIBOR rate manipulation. The company took this step to hide its borrowing costs from the outside market for the benefit of derivative traders and to avoid inquiry from market. Barclays lacked control and risk management to hide the fake submission of LIBOR rate. FSA did not take any disciplinary action at the initial stage but later on posed hefty amount as fines on the company after seeing that they were not conducting their business operations diligently for a certain span of time (Rose & Sesia, 2014, p. 7). Moreover, Barclays infringed the Commodity Exchange Act but cooperated with FSA in the case investigation.

LIBOR Rate Manipulation

Manipulation of the LIBOR rates was not only the reflection of the company decision but derivative traders with short term maturities from London and New York repeatedly demanded it. Derivative traders used to demand frequent rate changes to the money market desk for their personal gain (Rose & Sesia, 2014, p. 8). Fixed and floating interest rate swap affects the floating player with higher and lower payment with the consecutive changes in the LIBOR rates in over the counter (OTC) trading. Other banks were also pressurized to adjust their rate with the Barclays’ manipulated rate. Barclays’ never told the derivative traders that they were asking for unethical manipulation and passed the requests to the money market desk.

Financial Crisis due to high and low bid dilemma

Granting unlimited requests from the short term traders and the implementation of demands risked the security of other entities essentially as investment firms, governments, corporations, and households were linked to Barclays plc. The benefits are not equal due to the change in LIBOR interest rates. Barclays’ consulted FSA after they were exposed to media speculations regarding financial standards, which started an internal conflict with the senior and junior authorities resulting in higher LIBOR rates. The steady rise of LIBOR rates surpasses rest of the panel banks asserting financial crisis. The US faced crisis in money market and hence resulted in stagnation of all the fund holdings and the credit markets and it heavily impacted the UK money markets as well (Rose & Sesia, 2014, p. 10).

Causes and effects

Robert Diamond is designated as the CEO of Barclays plc to take account of foreign exchange business and debt markets. He didn’t take any strict action to stop the traders’ manipulation over money market desk that voids the business principles. It further depicts leadership faults resulting in an organization’s unethical framework (Brown & Trevino, 2006, p. 602).

Barclays’ way of serving derivative traders was unethical in terms of serving only their short term results (Mele et.al., 2107, p. 3). The company further lacked to think about the difference in profit making for their varied businesses. It created losses in lowering the LIBOR rate for some firms and reverses the result as it took the higher bid.

The nature of short term incentive is provocative for the derivative traders. Barclays acted to lower the LIBOR rate to cater one genre of investors, thereby making them uncertain in money market. They tried to skip the media controversy for the unethical financial outlook and led to the disastrous financial crisis over the US and the UK money market (Roulet, 2015, p.10).

Conclusion and Recommendations

LIBOR is a global benchmark associated with rate-setting process and inter-bank lending. LIBOR rates should be transparent in accordance with the market data. LIBOR authority should direct the banks through a proper code. The case of Barclays thus illustrated the lack of company ethics and transparency with respect to disreputable leadership resulting in nationwide financial crisis.

 

References

Brown, M. E. & Trevino, L. K. (2006). Ethical leadership: A review and future directions. The Leadership Quarterly, 17, 595-616.

Mele, D., Rosanas, J. M. & Fontrodana, J. (2017). Ethics in finance and accounting: Editorial introduction. J Bus Ethics, 140, 609-613.

Rose, C. S. & Sesia, A. (2014). Barclays and the LIBOR scandal. Boston: Harvard Business School Publishing.

Roulet, T. (2015). ‘‘What good is Wall Street?’’ Institutional contradiction and the diffusion of the stigma over the finance industry. J Bus Ethics, 130, 389-402.

Treanor, J. (2016). Barclays bank reaches $100m US settlement over Libor rigging scandal. Retrieved from https://www.theguardian.com/business/2016/aug/08/barclays-libor-100m-us-settlement

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