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Bankers Should Be Afraid of Their Own Shadow

According to regulators, Barclays traders and employees responsible for determining the bank's short-term funding costs attempted to manipulate or falsely reported benchmark interest rates to bolster profits or minimize losses on derivatives trades. Starting in 2005 Barclays's manipulation "occurred regularly and was pervasive," said the CFTC.

The FSA alleged in its fine that the bank may have violated so-called 'Chinese Walls' between its trading desks and treasury units to collude in manipulating lending rates on hundreds of occasions, and with other banks.

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 have roughly $350 trillion in outstanding market value.

A manipulation of the rates may have unfairly impacted the borrowing costs of homeowners, governments and corporations around the world, as the bank allegedly tried to profit or curb losses tied to floating interest rates at the height of the financial crisis.

In a letter to the U.K. Treasury dated June 28, CEO Diamond called the behavior of some of the banks traders, "wholly inappropriate," but added that improprieties were limited to a small number of traders, with no evidence implicating the firms upper management.

Although Diamond said senior management alerted authorities of the illicit trading when it was uncovered, he conceded, "it is clear that the control systems in place at the time were not strong enough." Still, in spite of apologizing to Treasury and opening an internal probe, Diamond said Barclays is demonstrating responsibility for the crisis-time market manipulation by having some top executives forgo bonuses in 2012 -- hardly an earth shaking move.

Other large banks that set short-term rates may be brought into the fray of an ongoing manipulation probe by the DoJ. In Thursday trading, Citigroup (C), Bank of America (BAC), RBS (RBS), Lloyds Banking Group (LBG), Credit Suisse (CS) and UBS (UBS) all slumped on the probe.

It's time to view Jamie Dimon and Bob Diamond as sacrificial lambs, now that they've fallen from haloed status on Wall Street, with few credible advocates for status quo remaining. And while some may push for their ouster, what's really needed is an acknowledgement that where banks once went un-policed, regulatory intervention is now paramount.

So far, some are taking a wait and see approach. The British Bankers Association, the governing body of short-term interest rates, 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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