FOREX NEW YORK COMPANIES

Barclays has just been hit with the biggest fine on record from Britain’s financial watchdog. And by two more even larger penalties in the US. Its appalling wrongdoing, though, was not consumer mis-selling or some other readily-understood abuse, but attempting to manipulate the arcane inter-bank lending rate and false reporting about benchmark interest rates.

Make no mistake, Barclays' “misconduct” amounts to massive abuse at the very heart of the financial system – to the benefit of the bank.

The inter-bank rate, Libor (or Euribor in Europe), is the benchmark from which most financial deals are priced. To give a sense of scale, here is the US Commodity Futures Trading Commission (CFTC). And, yes, that is trillions.

US dollar Libor is the basis for the settlement of futures traded on the Chicago Mercantile Exchange, with a notional value exceeding $564 trillion. Swaps with a notional value of approximately $350 trillion and loans amounting to $10 trillion are indexed to Libor.

Euribor is also used internationally in derivatives contracts. In 2011, over-the-counter interest rate derivatives referenced to Euro rates had a notional value in excess of $220 trillion. Libor and Euribor are relied upon by countless large and small businesses and individuals who trust that the rates are candid and reliable.

Clearly, with values that large, just the tiniest alteration in price can have an enormous impact. And Barclays was at it daily, “motivated by profit and to benefit Barclays’ trading positions”, the UK Financial Services Authority said. There is no way to assess exactly how much, if any, Barclays profited from the attempted manipulation,  but surely profit was there intention.

Barclays either pushed the Libor rate up at the behest of traders who needed a higher rate to turn a profit, or squeezed the rate lower to reduce its costs and make the bank appear better and safer than it actually was (low Libor rates being a sign of good health).

Every time, there would have been a counterparty victim who paid more or received less than they ought. And those costs would invariably have seeped through to the real economy – where households and companies would have picked up the tab.

What’s perhaps most remarkable about Libor, though, is how unsophisticated it is – and how easy to game. In a financial world that prides itself on skill and innovation, Libor is set daily by banks submitting the rate at which they can obtain unsecured lending to a central agency.

The numbers are not tested, making it easy to cheat. So Barclays tried to.

The CFTC’s observations paint a desperate picture of unethical behaviour at Barclays, which stretched right to “senior management”. Traders asked Libor setters to rig the rates to boost profits, and they did. Senior managers asked setters to push Libor lower to flatter the perception of the bank’s financial health, and they did.

“Barclays, in pursuit of its own self-interest, disregarded the fundamental principle that Libor and Euribor are supposed to reflect the costs of borrowing funds in certain markets,” the CFTC said. That's a big thing for a lender to "disregard".

Barclays’ £290m fine is unlikely to be the end of it, and other banks might be forking out large sums shortly. Private lawsuits are bound to come flooding in now.

As for Barclays' board, chief executive Bob Diamond has said he will forgo his bonus this year – as will his finance director and two lieutenants at the investment bank. That’s the least they should be doing. Previous bonuses should be clawed back, and Diamond has a lot more to answer for.

At the time of the "misconduct", he was head of the investment bank where the abuse was rife and said to be within "senior management". Questions must be asked about his stewardship of a business that apparently saw nothing wrong with trying to fiddle the numbers.

Barclays profited from the misconduct, and any huge bonuses would surely be made up of those ill-gotten gains.

It may not be the easiest subject to understand, but this case goes right to the heart of the problems within the banks.