Isn't it ironic? Citigroup (C) - Get Report  has been ordered to pay $425 million for manipulating a benchmark interest rate, in what a regulator says was a misguided effort to conceal the fact that it was having to pay more than that amount to borrow money before the 2008 financial crisis.

At the time, widespread awareness that peers were charging more to lend money to Citi would have signaled weakness at the New York bank that might have spooked investors. Indeed, concerns about whether banks could withstand widespread mortgage defaults after the collapse of Lehman Brothers in September 2008 also led to runs on Morgan Stanley and Goldman Sachs.

The Commodity Futures Trading Commission fined Citigroup $175 million in connection with manipulations of the London Interbank Offered Rate and the Tokyo Interbank Offered Rate, two benchmarks set daily that reflect what banks pay to borrow money from each other. Citi was ordered to pay a $250 million penalty in an ISDAfix benchmark case. 

The commission said in a statement that it has a responsibility to hold "a financial institution, like Citi, responsible each time it acts to undermine a benchmark for its personal profit or benefit."

From the spring of 2008 to the summer of 2009, Citibank manipulated reports on how much it was paying to borrow money in order to avoid questions about its "health and liquidity," the commission said. The bank received one of the largest U.S. government bailouts given during the crisis, nearly $476 billion in cash and guarantees, as U.S. regulators worked to back up companies whose collapse might further threaten the broader economy. Bank of America (BAC) - Get Report came in second, and Morgan Stanley (MS) - Get Report was third.

Citibank "submitters realized that Citi's submissions could draw negative media attention and raise questions about the stability of the bank," the commission said. Consequently, the bank's reports "at times, did not accurately or solely reflect Citi's assessment of the costs of borrowing unsecured funds" in the London market.

The ISDAfix, collected by the International Swaps and Derivatives Association (ISDA), is a fixed-rate benchmark for derivatives, including interest rate swaps, which Citi also attempted to massage, the commission said.

"This is just the first of their LIBOR commitments," Erik Oja, banking analyst at S&P Global Market Intelligence said. "There'll be further fines down the road." 

The settlement follows the reinstatement of private antitrust lawsuits against 16 banks, including Citigroup, Bank of America, and JPMorgan Chase (JPM) - Get Report   by a U.S. appeals court on Monday. Investors in those cases claimed that the bank's manipulation of the LIBOR negatively affected their investments.

In total, the commodities trading commission has imposed penalties of $735 million in three enforcement actions against Citigroup, which is the first U.S. bank to deal with the benchmark-related cases. The order also called for Citibank to take specific steps to insure the accuracy of future reports linked to such rates.

The agency acknowledged, however, that Citigroup "promptly" reported the benchmark violations and that its cooperation will "not go unnoticed."

Citigroup has fallen 10% this year in New York trading, to $46.36, a drop nearly three times as large as the broader KBW Bank Index's decline.

"While I never like to see a bank paying large fines like this," Oja said, "at the same time, it always adds to the certainty going forward."

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