Barclays Scandal: Libor

From Amanda Chua, Financial Manager To Sir David Walker, Chairman of Barclays Plc. Date twenty-fourth February 2013 Subject Implication of The Recent Libor-Fixing Scandal for Barclays Bank 1. Executive abridgment * The London Interbank Offered rank (Libor) is the average interest tread charged to banks for alter specie in the interbank market (Investopedia n. d. ). * The UK Treasury report that Libor is responsible for an estimated $ three hundred trillion worth of pecuniary transaction (BBC 2012). Barclays traders hold oerted inappropriate rank upon differential coefficient traders request (FSA 2012). * Barclays submitted inappropriate identify to prevent negative media attention (FSA 2012). * Barclays was fined ? 290 meg for Libor poop (Wilson 2012). * Former Chairman, CEO and COO re attributeed in July 2012 (BBC (B) 2013). * Barclays shargon prices fluctuated out-of-pocket to Libor Scandal (Fletcher 2012). * Pursuing profit maximization, Barclays necessarily exploi ted its stakeholders (MBA Knowledge alkali n. d. ). Financial managers think solely for the purpose of profit maximization for the shareowners as it lose focus, carrying out unhonorable behaviors to gain short-term gratification. * Barclays is suggested to create shareholder value by combining a swell up-thought-of terminal with focused fiscal grooming that pass on deliver returns to shareholders but in an ethical manner that is grateful by the society (Barclays Boss Lays Out revitalisation Plans, 2013). * Installation of more(prenominal) modern surveillance devices further enforces plan as employees are observeed closely in efforts to control the wellbeing of the workers (Roland 2013). Barclays is suggested to form a neutral ring-fenced rate-setting unit to monitor the rates submission (Daniels 2013). 2. Libor Explained The London Interbank Offered tempo (Libor) is the average interest rate charged to banks for lending cash in the interbank market (Investopedia n. d. ). Major banks in London who are under BBA submit the rate they presume they will have to pay for borrowing funds from an other(a) bank to Thomson Reuters, who will then discard the four lowest and highest rates and use the emainders to calculate the average, resulting with the Libor rate (Kiff 2012). The importance of Libor It is used as the benchmark for interest rates around the world (Surowiecki 2012). The UK Treasury reported that Libor is responsible for an estimated $ three hundred trillion worth of financial transaction (BBC 2012) much(prenominal) as mortgages, corporate loans and derivatives (Surowiecki 2012). Also, Libor acts as a barometer for the welfare of the volatile global financial market (BBA n. d. ). 3. Barclays mistakesEmployees at Barclays submitted lower than actual predicted rates to Thomson Reuters (Murray-West 2012). why it was d atomic number 53 Derivative transactions made use of the Libor rate. Hence, the fluctuation of the rates would influence the p rofit gained for the traders (Surowiecki 2012). Both the traders and rate submitters cooperated through frequent interaction (Surowiecki 2012) as traders requested for lower rates because they would benefit by gainful less for the interest charged on the derivatives.Barclays submitted lower rates to wait the trouble state it faced during the 2008 credit crunch (Murray-West 2012) when initially their submitted rates were high than other banks (Bischoff & McGagh 2013). Lower rates prove that banks intending to lend funds to Barclays were assertive of their financial health, because the less assurance a bank had for another, the higher the rate charges will be (Bischoff & McGagh 2013), and Barclays expressed the contrary to conceal their financial instability.It was said that bobsleigh Diamond, then chief executive officer of Barclays, was contacted by Paul Tucker, the deputy governor of the bank, concerning the recurrent greater rates amongst other banks, which worried Diamond wh o conveyed the intelligence agency to Jerry del Missier, then chief operating officer, who misinterpreted the currents as a command to rig the rate (Bischoff & McGagh 2013). How it was done. It was effortless to master the rates because they are derived from estimates rather than calculated values (Eavis & Popper 2012).Also, interbank borrowings were reduced during the financial crisis ca using difficulty in evaluating whether submitted rates were realistic (Wheatley 2012). 4. Consequences for Barclays scandal Manipulating the Libor rate is intolerable and investigation involving the FBI is a themeal toll in itself (R. D. 2012), not and towards Barclays but in the banking sector as a whole where regulators are still speculating which other banks were involved (Bischoff & McGagh 2013). Barclays received a total of ? 290 billion penalty from FSA, CFTC and DoJ (R. D. 012) for manipulating the Libor rate. Furthermore, former Barclays chairman, Marcus Agius resigned on July 2nd 20 12, followed by Bob Diamond and Jerry Del Missier on July 3rd 2012 as a result for their elaborateness in the LIBOR scandal (BBC (B) 2013). Similarly, 3700 employees were discharged to reorganize the Barclays banking regime (McGee 2013). As Libor accounts for $300 trillion worth of financial transaction, this affects many because lenders lose out as the borrowers benefit from the low interest rate charges and people are very disappointed at the extend to where Barclays has went to.Due to the scandal, Barclays share prices fluctuated because the market expected charges for lawsuits against Barclays and it reflected the reputational damage Barclays has encountered for its involvement in the scandal (Armour, n. d. ), though this has caused an overhaul in Barclays that resulted in the increase of share prices months after. Moreover, investment firms and municipal government who fell victim to the Libor scandal due to the buying of bonds or signing of contracts demanded reimbursement from Barclays and will inevitably elicit legal actions (Bloomberg News 2012). 5. Role of Financial ManagementProfit maximization is the terminus of financial management (Hillier et al, 2011) indicating that its objective is gaining greatest profits by using all likely resources irrespective of the consequences or underlying risk (OFarrell n. d. ). This is seen as Barclays traders tried to maximize profits for their own benefit as well as their stakeholders. Shortcomings of Profit Maximization During the financial crisis, banks were financially unstable, they refused to borrow one another funds because of the low confidence they had for one another, seen through the Libor ratings that were previously submitted before the Libor rigging scandal.Barclays chose to conceal its proper Libor rates that would have indicated its upset state to the public. This was second by the fact that a firm who pursues the goal of profit maximization will inevitably exploit its workers and consumers, which exemplify an unethical way of carrying out a business resulting from its corrupted practices (MBA Knowledge brute n. d. ). In Barclays case, this was shown by its objective to save the banks reputation by finding means to profit maximize to avoid possible outcomes of failure.Jerrys assumption of Bobs instruction to fix the Libor rate when it was unfavorable (Bischoff & McGagh 2013) is another illustration of profit maximization gone misuse when financial managers think solely for the purpose of profit maximization for the shareholders as it diverge its actions by carrying out unethical behaviors to gain short-term gratification. Barclays has miss possible risks because they were in like manner focus on profit maximization as they rigged the Libor for the past years. Risk ignorance is another flaw of profit maximization (eFinance Management n. . ) because firms tend to be shortsighted towards maximizing profit they desolate their morale. This is shown by the reputational d amage as a consequence of the scandal. Lastly, the disregard of musical note is a shortcoming (eFinance Management n. d. ) shown through Barclays scandal because Barclays obsessed over profit maximization, it neglected the goodwill of the bank. Barclays being a world-renowned bank that was get through the years overlooked its goodwill as an asset as it rigged the Libor rate to earn short-term profits. . Summary It can be concluded that Barclays manipulation of the Libor rate was unacceptable. However, they have taken full certificate of indebtedness over the consequences. It is suggested that Barclays make an overhaul in its management by changing its mentality from a bank that gravitated its goal on profit maximization to prioritizing an ethical environment before its success (Mcgee 2013) through removing workers incapable of committing to the rewrite goal (BBC (A) 2013), as this will be a long-term change. (Waldie 013) Antony Jenkins, the new Barclays CEO mentioned in Barclay s Boss Lays Out Revival Plans (2013) that Barclays was previously too shortsighted as well as being too rapacious and self-serving. Nonetheless, the current damage helps Barclays to learn from experience. Presently, it is advice to create shareholder value by combining a well-thought-of goal with focused financial planning that will deliver returns to shareholders but in an ethical manner that is acceptable by the society (Barclays Boss Lays Out Revival Plans 2013).Installation of more advanced surveillance devices further enforces this plan as employees are monitored closely in efforts to control the wellbeing of the workers (Roland 2013). Lastly, it is suggested to form a neutral ring-fenced rate-setting unit to monitor the rates submission (Daniels 2013) in Barclays and this combines with trainings that shall be implemented to nurture an ethical and systematical way of setting the Libor rate. This plan aids by applying a squad submission rate rather than an individuals whereby rates submitted will be relatively reliable. BibliographyACTUELNEWSCHANNEL. 2013. Barclays Boss Lays Out Revival Plans online. Accessed 22 February 2013. available from http//www. youtube. com/watch? v=4dznoD8yd14 ARMOUR, J. 2012. The Price of Reputation Lessons from the Barclays LIBOR Scandal online. Accessed 9 jar against 2013. gettable from http//www. clmr. unsw. edu. au/article/ethics/libor-manipulation/price-reputation-lessons-barclays-libor-scandal BBALIBOR. no date. bbalibor explained online. Accessed 28 January 2013. in stock(predicate) from http//www. bbalibor. com/bbalibor-explained/the-basics BBC. 2012.Libor what is it and why does it matter online. Accessed 28 January 2013. usable from http//www. bbc. co. uk/news/business-19199683 BBC (A). 2013. Barclays boss tells staff sign up to ethnics or leave online. Accessed 18 February 2013. Available from http//www. bbc. co. uk/news/business-21064590 BBC (B). 2013. Timeline Libor-fixing scandal online. Accessed 8 February 2013. Available from http//www. bbc. co. uk/news/business-18671255 BISCHOFF, V and MCGAGH, M. 2013. Q&A what is Libor and what did the banks do to it online. Accessed 8 February 2013.Available from http//citywire. co. uk/money/qanda-what-is-libor-and-what-did-the-banks-do-to-it/a600479/3 BLOOMBERG NEWS. 2012. Consequences to banks of Libor scandal staggering online. Accessed 8 February 2013. Available from http//www. winnipegfreepress. com/fpnewsvoices/Consequences-to-banks-of-Libor-scandal-staggering-162730376. hypertext mark-up language DANIELS, V. 2013. RBS Outlines The Actions Management Has Taken Following Discovery Of LIBOR Scandal online. Accessed 8 environ 2013. Available from http//hereisthecity. com/2013/02/06/rbs-outlines-the-actions-management-has-taken-following-libor-sc/EAVIS, P and POPPER, N. 2012. Libor Scandal Shows Many Flaws in Rate-Setting online. Accessed 22 February 2013. Available from http//dealbook. nytimes. com/2012/07/19/libor-scandal-shows-many-flaws-in -rate-setting/ EFINANCE MANAGEMENT. no date. Profit Maximization online. Accessed 6 March 2013. Available from http//www. efinancemanagement. com/finance-financial-management/87-profit pecuniary SERVICE AUTHORITY. 2012. Final Notice. England FSA. Accessed 22 February 2013. Available from http//www. fsa. gov. uk/static/pubs/final/barclays-jun12. pdf FLETCHER, N. 2012. Barclays drops more than 10% after Libor scandal, with other UK banks also hit online. Accessed 8 February 2013. Available from http//www. guardian. co. uk/business/marketforceslive/2012/jun/28/barclays-uk-banks-libor-scandal HILLIER ET AL. 2011. Fundamentals of Corporate Finance. Europe McGraw. INVESTOPEDIA. no date. London Interbank Offered Rate Libor online. Accessed 28 January 2013. Available from http//www. investopedia. com/terms/l/libor. aspaxzz2LAAqHDOs KIFF. 2012. What is LIBOR online. Accessed 28 January 2013. Available from http//www. mf. org/external/pubs/ft/fandd/2012/12/basics. htm MBA KNOWLEDGE BASE. no date. Objectives of Financial Management online. Accessed 22 February 2013. Available from http//www. mbaknol. com/financial-management/objectives-of-financial-management/ MCGEE, S. 2013. Confessions of a Barclays Banker Whos Seen The Light online. Accessed 22 February 2013. Available from http//www. thefiscaltimes. com/Columns/2013/02/19/Confessions-of-a-Barclays-Banker-Whos-Seen-the-Light. aspxpage1 MURRAY-WEST, R. 2012. What does the Libor scandal mean for us online. Accessed 8 February 2013. Available from http//www. telegraph. co. uk/finance/personalfinance/consumertips/banking/9364994/What-does-the-Libor-scandal-mean-for-us. hypertext markup language OFARRELL, R. no date. Advantages & Disadvantages of Profit Maximization online. Accessed 22 February 2013. Available from http//smallbusiness. chron. com/advantages-disadvantages-profit-maximization-11225. html R. D. 2012. bird of Jove fried online. Accessed 8 February 2013. Available from http//www. economist. com/blogs/schumpe ter/2012/06/barclays%E2%80%99-libor-emb