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

Updated with British Bankers Association comments, trader correspondance.

NEW YORK ( TheStreet) -- Barclays ( BCS) has agreed to pay regulators in the U.S. and Europe almost $500 million to settle a probe of its manipulation of key benchmark rates known as Libor and Euribor that appear to stretch from the banks trading desks to senior management.

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 three separate penalties, Barclays will pay the Commodity Futures Trading Commission, the U.S. Department of Justice and the U.K.'s Financial Service Authority a total of $454 million. In the CFTC's settlement, Barclays traders - with the assistance of senior management -- are accused of attempting to manipulate the bank's true funding costs, which are key to setting short-term interest rates that are used in roughly $350 trillion of financial market contracts.

According to the CFTC, Barclays traders and employees responsible for determining the bank's LIBOR and Euribor funding costs attempted to manipulate and falsely reported the benchmark interest rates to bolster profits or minimize losses on derivatives trades. Starting in 2005 Barclays's manipulation "occurred regularly and was pervasive" and involved the bank's traders in New York, London and Tokyo, in addition to "high levels of management within Barclays Bank," said the CFTC in its settlement order.

During the financial crisis between August 2007 and early 2009, Barclays is accused of making artificially low Libor submissions to protect the bank from negative market and media perceptions concerning its funding costs, with instructions coming from Barclays' senior management, the CFTC said. In addition, they accuse Barclays' European traders of aiding and abetting traders at other banks in each other's attempts to manipulate Euribor.

Already, the process of setting the rates, which is governed by the British Banking Association, has been criticized as being too opaque and giving far too much power to the world's largest banks. Banks are polled on the costs to borrow from each other in different currencies like the dollar, yen, euro and Swiss franc for 15 different periods, from overnight to one year. Some high and low quotes are excluded, with remaining bids averaged and set by the BBA.

In the Department of Justice's settlement, it said on Wednesday that, "Barclays has admitted and accepted responsibility for its misconduct." The agency also added that a criminal investigation into the manipulation of Libor and Euribor by other financial institutions and individuals is ongoing and that its settlement with Barclays compels the bank to continue its cooperation on that investigation.

Barclays settlement may be the first in a series of regulatory penalties that may be handed out to banking giants like HSBC ( HBC), Citigroup ( C), The Royal Bank of Scotland ( RBS) and JPMorgan ( JPM).

"Because mortgages, student loans, financial derivatives, and other financial products rely on LIBOR and EURIBOR as reference rates, the manipulation of submissions used to calculate those rates can have significant negative effects on consumers and financial markets worldwide," said Assistant Attorney General Lanny Breuer, in a statement.

Libor, or the London Interbank Offered Rate is a key reference rate for short-term bank funding, interest rate swaps, corporate bonds and even consumer financial products like adjustable rate mortgages.

The DoJ's investigations have ties to a financial crimes task force launched by President Barack Obama in January.

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