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Barclays Fine Signals Fraud In $350 Trillion Lending Market (Update 1)

In addition to masking true crisis-time borrowing costs, keeping overnight interest rates artificially low or unfairly high could have also helped banks keep payments on derivatives like interest rate swaps from spiking, while also stopping consumer financial products like adjustable rate mortgage rates from rising.

Meanwhile, the manipulation of the rate may have minimized the banks payments due to corporations and municipalities who swapped fixed rate debt payments for floating rate contracts.

Breuer credited Barclays with its efforts in assisting the DoJ's Criminal Division in an ongoing investigation of "individuals and other financial institutions," related to market manipulation.

"The events which gave rise to today's resolutions relate to past actions which fell well short of the standards to which Barclays aspires in the conduct of its business," said Barclays chief executive Bob Diamond in a statement. "I am sorry that some people acted in a manner not consistent with our culture and values," Diamond added. He and top executives Chris Lucas, Jerry del Missier, Rich Ricci said they will forgo any annual bonus as a result of the violations.

"The American public and our markets rely upon the integrity of benchmark interest rates like LIBOR and Euribor because they form the basis for hundreds of trillions of dollars of transactions and affect nearly every corner of the global economy," said David Meister, the CFTC's Director of Enforcement.

The New York Times reports that regulators are looking into whether banks violated so-called 'Chinese Walls' between their trading desks and treasury units to collude in manipulating lending rates. In the process of setting short-term rates, trading desks and treasury departments are supposed to interact at an arms length; however, emails uncovered by regulators in Barclays settlement cast doubt on that process.

For instance, in a 2007 interaction that regulators uncovered, a Barclays trader asked a treasury employee tasked with submitting BBA rates to manipulate that process. "Pls set 3 [month] libor as high as possible today," the trader asked. "Sure 5.37 okay?" replied the submitter. "5.36 is fine."

A manipulation probe into the $350 trillion financial market tied to short term interest rates began to grow in early 2012, with banks Credit Suisse (CS) and UBS (UBS) coming under increasing scrutiny by Swiss competition watchdogs in February, according to a Bloomberg report.

Regulators around the world, including the DoJ, FSA and Japanese and European agencies are investigating manipulation of the setting of the benchmark rates, which are a key part of opaque credit and interest rate derivative markets that are subject to recent regulatory reforms like the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.

Barclays $200 million fine is the largest CFTC settlement ever. For the Department of Justice, the settlement is the first after it launched a probe on 16 of the world's largest banks including Barclays, Bank of America (BAC) and Citigroup, last July. In July 2011, the DoJ granted immunity to UBS in its Libor probe.

At the onset of the financial crisis in the summer of 2007, overnight rates like Libor spiked as banks faced a cash squeeze, prompting the Federal Reserve and other central banks around the world to launch emergency liquidity facilities. The question now is whether there was pervasive collusion by banks to lower their borrowing costs during the crisis, keeping Libor and short term borrowing from rising substantially.

Libor is set every day in London at 11 a.m., using submissions by a consortium of banks that report the rate they are paying to borrow. Roughly $10 trillion in loans and $350 trillion in derivatives are tied to Libor, according to The Wall Street Journal calculations.

In a statement, the BBA, which is investigating its rate setting process, said, "This is an announcement with extremely serious implications which need to be carefully considered and the investigation findings will be fully included in the current review of Libor."

-- Written by Antoine Gara in New York

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