Barclays manipulation of the LIBOR rate may impact pensions

Diamond’s not forever

Bob Diamond is an American Banker and until his resignation today was Chief Executive of Barclays Bank having previously headed up the bank’s investment arm. It is the bank’s investment arm during Mr Diamond’s watch that has been the subject of an investigation by the Financial Services Act (FSA) leading to a record fine for Barclays of £290m. The FSA found Barclays had committed ‘serious, widespread’ breaches of City rules relating to the Libor and Euribor rates. In short Barclays were deliberately lying about the rates other banks were charging it for loans. Giving a lower reading than the true rate would give the impression Barclays was considered a better lending risk than it was, making it easier for Barclays to borrow money. Giving a higher rate could have inflated profits artificially, misleading investors and regulators. Following on from the banking crisis and lack of public confidence in banks, this undeniable proof that at least one major bank was willing to systematically lie for its own best interests was always going to lead to wholesale slaughter at senior level as Barclays seeks desperately to limit the substantial damage to its reputation. Libor (and its European equivalent Euribor) is an incredibly important benchmark reference rate, and it is relied on for many, many hundreds of thousands of contracts all over the world.

Marcus Agius has resigned as Chairman of Barclays over the scandal saying the buck stops with him. That was certainly the view of Bob Diamond who only a few days ago publically announced he would not be resigning over the matter. Mr Diamond who earned £20.9m in 2011, and is reported to have wealth of £105m, had initially proposed only not taking his bonus for this year! For him this was at best a slap on the wrist. His subsequent resignation today with immediate effect comes as no surprise to the rest of us. He claims he was not aware of what was going on in the investment arm of Barclays which he headed.

Mr Diamond told MPs last year that the time for “remorse and apology” by banks over their role in the financial crisis should end. While the FSA investigation has concluded, the UK Serious Fraud Office are looking into whether any criminal offences have been committed. In addition the U.S. Department of Justice has also been involved in the investigation. Remorse and apology are back on the agenda at Barclays. The last Bob in pensions to be in this much trouble at least had the good grace to fall off the back of his boat. Mr Diamond had to be pushed.

Barclays manipulation of the LIBOR rate may have impacted on occupational pension schemes for example:

• It commonly affects commercial mortgages in which pension schemes may have made investments
• It could have affected swaps
• Anyone buying Barclays short-term bonds may have been paid less interest than they should have been paid
• And any pension schemes who had large exposure to Barclays shares will have suffered when they nosedived following the announcement of the fine last week. Moreover as many otherwise prosperous businesses have found out a scandal of this proportion can affect their long term prosperity and even drive them out of business

Because of the difficulty in unpicking relevant transactions and proving that Barclays lies actually impacted on any given transaction it is unlikely that those affected will be aware of possible losses. Nevertheless, I expect there will be a number of pension schemes considering legal action to try to establish their losses and then mitigate them – if this had happened in the US I expect a class action would have been inevitable. With other banks expected to be implicated in the weeks ahead this issue could run on for years.

Deputy Prime Minister Nick Clegg has said we need people in banking who take responsibility when things go wrong, not just the big bucks when things go right. We also, I would suggest, need people in Government to impose much tighter laws on banks to make them be behave professionally and in a reasonable and decent manner. The public image of bankers already at an all-time low means banks and in particular Barclays can ill afford another scandal. We can only hope that that Mr Clegg and his colleagues now put the banks under the same sort of scrutiny as trustees of pension funds,

When your pension funds investment manager is claiming to have met his target of say “LIBOR plus 3″, ask him whose LIBOR rate he is using – the real one or Barclays?

I am the Managing Director of Buck Consultants in Europe. The opinions expressed here are my own, and do not necessarily represent Buck’s positions, strategies, or ideas.