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Barclays’ (BCS) Libor-Fixing Scandal Brings Down the House

By: , dated July 9th, 2012

Barclays (BCS: Charts, News), the world’s fourth-largest bank in total assets, went down in flames last week after its besieged CEO, Bob Diamond, stepped down after admitting that its traders engaged in “reprehensible” behavior in fixing Libor (London Interbank Offered Rate) rates. The Libor is the world’s most widely used benchmark of short-term interest rates, which dictates the lending rates of major financial institutions. As Diamond stepped down, he stated that he was made “physically ill” by the news that at least 14 of his traders had been rigging Libor rates for nearly four years. Yet he plead ignorance, stating that a handful of rogue traders had forever tainted the reputation of all 140,000 Barclays employees. Although the investigation is ongoing, it is believed that Barclays began fixing Libor rates in October 2008 as the world’s financial systems began to crumble, and that it persisted to do so in order to avoid being nationalized.

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Barclays agreed to pay 290 million pounds to US and UK regulators to settle charges that its traders had conspired to manipulate the interbank lending rate. In addition to Diamond, the scandal also forced the resignations of Barclays’ Chairman Marcus Agius and COO Jerry Del Missier. Barclays was targeted as part of a larger investigation into rampant lending rate manipulation of the Libor as well as its European counterpart, the Euribor, by several major European banks. Libor rates are calculated for a variety of lending periods and refreshed daily by the British Bankers’ Association. The Libor rate is regarded as a base rate and only available for preferred lenders, while financial institutions set their lending rates higher than the official Libor rate for non-preferred ones. The Libor is also a key reference rate for the United States, Canada and Switzerland. An estimated $800 trillion in securities is tied to Libor rates, which makes Barclays’ behavior both dangerous for itself and global investors.

The Barclays investigation has triggered an independent review of interbank lending rates by the British government. Prime Minister David Cameron stated that he plans to prosecute all accountable parties in the Barclays scandal, while opposition leader Ed Miliband went a step further to demand a full public inquiry of all banking practices. The Barclays scandal is considered an embarrassing blow to the United Kingdom’s ailing banking sector, which was only saved through massive bailouts following the financial crises of 2008-2009. Bob Diamond’s fall from grace has also tainted the reputation of Paul Tucker, a deputy governor of the Bank of England who is currently in the running to become the next governor. Tucker allegedly communicated multiple times with Diamond regarding Barclays’ high Libor rates starting in 2008. Tucker has made a formal request to testify before a committee regarding his role in the Barclays scandal.

Shares of Barclays have crashed 19% since the scandal surfaced. The stock is down nearly 37% over the past twelve months, and trades with a price-to-book ratio of 0.37. While value investors following the tenets of Graham and Buffett may think this is a cheap stock, many analysts believe that Barclays’ book value of 55.6 billion pounds is fictional.

Like many troubled financial institutions, Barclays’ balance sheet shows a massive amount – 7.8 billion pounds – of intangibles, such as goodwill, customer lists and deferred tax assets. Intangibles are generally considered useless in a true financial crisis, and are widely regarded as excess top line padding. In its previous annual report, Barclays also stated that 32 billion pounds of its assets were classified as “Level 3,” which depends on data “not observable in the marketplace.” The opaque nature of Barclays’ financial reports have made it increasingly difficult for investors to trust the bank’s management.

Despite massive economic and regulatory headwinds, shares of Barclays have never been cheaper, trading at 3.6 times forward earnings with a 5-year PEG ratio of 0.14. The stock pays a quarterly dividend of 25 cents, a 2.3% yield at current prices.

Other News About BCS
Barclays No Longer a Bank Stock Buy
Shrinking earnings and massive scandals convince analysts to downgrade Barclays.
Barclays Strategy Backfires in Libor Scandal
Barclays aggressive defense strategy taints it further.

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Leo Sun Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

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One Response to “Barclays’ (BCS) Libor-Fixing Scandal Brings Down the House”

  1. Elmer Fittery says:

    When a whistle blower makes an aligation, assume it is true and then prove it is FALSE. The damage that can occure because an aligation is made and it is not true is nothing compared to assuming some aligation is false. Just look at Enron as an example. An aligation was made and then ignored for a long period of time. Because of the delay in handling billions in pensions and investments were lost. Just my humble opinion.

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