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CLAYTON S. ROSE
ALDO SESIA
Barclays and the LIBOR Scandal
LIBOR is an incredibly important benchmark reference rate, and it is relied on for many, many hundreds of
thousands of contracts all over the world. And the market needs to have confidence that those who are involved
in submitting numbers to set LIBOR are thinking about the integrity of the market, and confidence in the
market, and not their own interests.
— Tracey McDermott, Director of Enforcement, U.K. FSA, June 27, 20121
The idea that one can base the future calculation of LIBOR on the idea that “my word is my LIBOR” is now
dead.
— Sir Mervyn King, Governor, Bank of England, June 29, 20122
“I don’t feel personally culpable. What I do feel is a strong sense of responsibility.” 3 These were
Bob Diamond’s sentiments as he testified on July 4, 2012, before the Treasury Select Committee of the
U.K. House of Commons, one day after he stepped down as CEO of Barclays plc (Barclays), one of
the world’s largest banks.
A few weeks earlier, Barclays had settled with U.K. and U.S. regulators and agreed to pay $450
million in fines. Central to the settlement was Barclays’ acknowledgement that it had manipulated
LIBOR (the London Inter-Bank Offered Rate)—a benchmark reference rate that was fundamental to
the operation of international financial markets and was the basis for trillions of dollars of financial
transactions. It had done so on hundreds of occasions between 2005 and 2009 to gain profits and/or
limit losses from derivative trades. In addition, between 2007 and 2009, the firm had made
dishonestly low LIBOR submission rates to dampen market speculation and negative media
comments about the firm’s viability during the financial crisis. While Barclays was the first bank to
settle with regulators, as many as 20 big banks were under investigation or named in lawsuits
alleging misconduct related to LIBOR.4
Testifying, Diamond blamed a small number of employees for the derivative trading–related
LIBOR rate violations and termed their actions as “reprehensible.”5 As for rigging LIBOR rates to
limit market and media speculation of Barclays’ financial viability, Diamond denied any personal
wrongdoing and argued that, if anything, Barclays was more honest in its LIBOR submissions than
other banks—questioning how banks that were so troubled as to later be partly nationalized could
appear to borrow at a lower rate than Barclays.
____________________________________________________________________________________________________________
Professor Clayton S. Rose and Senior Researcher Aldo Sesia of the Global Research Group prepared this case. This case was developed from
published sources. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of
primary data, or illustrations of effective or ineffective management.
Copyright © 2013, 2014 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-5457685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu/educators. This publication may not be
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Barclays and the LIBOR Scandal
Diamond was a controversial figure within the London financial markets and among the British
political class. On this day, he drew the ire of some members of the committee by addressing them by
their first names rather than their full titles, as protocol suggested. Teresa Pearce, a Labour member of
Parliament and a member of the committee, was put off. She said, “I was surprised that he
continually addressed us by our first name, especially as I’ve only met him once before and that was
in a formal setting. . . . So it seemed inappropriate and showed a lack of respect. . . . [I]t was annoying
to most members of the committee.”6
LIBOR
According to Minos Zombanakis, a former banker at Manufacturers Hanover, he made the very
first LIBOR loan in 1969—$80 million extended by a group of banks to Iran. “We had to fix a rate, so I
called up all the banks and asked them to send to me by 11 a.m. their cost of money,” he recalled.
“We got the rates, I made an average of them all and I named it the London interbank offer rate.” 7 For
more than 15 years, the rate was set more or less as Zombanakis described. He later commented that
it was a sense of responsibility and trust among large banks that underpinned the rate’s pervasive
use throughout the financial system.
LIBORa was intended to represent the cost of unsecured funding in the open market for the largest
financial firms. Whereas central banks (i.e., the Bank of England, the U.S. Federal Reserve, and the
European Central Bank) would periodically fix official lending (or base) rates, LIBOR was designed
to reflect the rates at which large banks borrowed money from one another each day; these rates were
the foundation for what they would then charge their customers.8 Mortgages, credit cards, student
loans, and other consumer and commercial lending products often used LIBOR as a reference rate. 9
In addition, vast numbers of derivative instruments that traded in the over-the-counter (OTC) market
and on exchanges worldwide were settled based on LIBOR. 10 Loans amounting to $10 trillion,
including half the adjustable rate mortgages in the U.S., and interest rate swaps with a notional value
of approximately $350 trillion were indexed to LIBOR.11 On the Chicago Mercantile Exchange (CME),
over $564 trillion of futures contracts tied to the value of LIBOR traded in 2011.12
In 1986, the British Bankers Association (BBA) took over the process of managing, defining, and
setting LIBOR, as the club of “gentlemen bankers” making syndicated loans in the City of London
had evolved into a global, multitrillion-dollar market.13 The BBA was a trade association with over
200 member banks that addressed issues involving the U.K.’s banking and financial services
industries (see Exhibit 1 for details about BBA). The BBA published the first official LIBOR rates in
three currencies: U.S. dollar, Japanese yen, and British pound. By 2012, LIBOR was produced for 10
currencies, with 15 maturities quoted for each—ranging from overnight to 12 months—thus
producing 150 rates each business day.14
Setting the Rate
The BBA defined LIBOR as the hypothetical rate at which a bank could borrow from another bank
in a specific maturity for an indeterminate amount. Its specific definition of LIBOR was:
The rate at which an individual Contributor Panel bank could borrow funds, were it to do
so by asking for and then accepting inter-bank offers in reasonable market size, just prior to
11:00 [a.m.] London time.15
a Pronounced “lie-bore.”
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There were different panels of banks that contributed submissions for each currency for LIBOR.
For the U.S. dollar LIBOR, there were 16 banks, including Barclays, that submitted rates. Each bank
submitted its rates into an electronic spreadsheet each day between 11:00 a.m. and 11:10 a.m. London
time, which was sent to Thomson Reuters (Thomson), the organization that managed the LIBOR ratesetting process for the BBA. Thomson then created a LIBOR rate for each maturity, using the
“trimmed mean” structure dictated by the BBA. For the U.S. dollar LIBOR, the “trimmed mean”
involved throwing out the four highest and four lowest rates that were submitted, and then
averaging the remaining eight submissions16 (see Exhibit 2 for the rate-setting process). Thomson
then distributed the calculated LIBOR rates (as well as all 16 submissions) by midday in London to a
range of news and financial information services around the world.17
A similar process existed for EURIBOR (the Euro Inter-Bank Offered Rate), the rates for maturities
from overnight to one year for borrowing in euros. Although the European Banking Federation,
rather than the BBA, oversaw EURIBOR, its process was similar to the BBA’s LIBOR process. Forty to
50 banks submitted rates, the top 15% and bottom 15% of the rates were eliminated, with the balance
averaged to determine EURIBOR in a given maturity.18
Concerns about LIBOR
In September 2007, an article in the Financial Times titled “Libor’s value called into question” noted
the complaint of the treasurer of one of the largest U.K. banks that “[t]he Libor rates are a bit of a
fiction. The number on the screen doesn’t always match what we see now.” 19 In April 2008, the Wall
Street Journal published an article called “Bankers cast doubt on Key Rate amid crisis.”20 Discussion of
the potential for manipulating LIBOR was occurring not only in the media, but academics and
international authorities were also looking at weakness in the LIBOR rate-setting process.21
From November 2007 through October 2008, at a time of diminished liquidity and great
uncertainty in the market, Barclays’ employees had raised concerns with the BBA, U.K. Financial
Services Authority (FSA), Bank of England (BoE), and Federal Reserve Bank of New York (NY Fed)
that the rates submitted by panel banks for the U.S. dollar LIBOR were too low and did not
accurately reflect their true cost of borrowing. In some of those communications, these employees
said that all panel banks, including Barclays, were contributing rates that were too low. 22
In May 2008, the NY Fed issued a report that raised questions about the LIBOR rate-setting
process. Because panel banks quoted the rate at which they “could borrow funds” (rather than rates
actually incurred), the NY Fed concluded the process could lead to some deliberate misreporting. 23
Furthermore, the NY Fed concluded that panel banks were asked to provide quotes that were subject
to ambiguity along two dimensions—transaction size, which was not clearly specified; and maturities
in which there was little or no interbank term activity. 24 NY Fed President Timothy Geithner had emailed BoE Governor Mervyn King on June 1, 2008, with recommendations on how to enhance the
accuracy and credibility of LIBOR. 25 King sent the recommendations to the BBA for use in its review
of the rate-setting process.
Later in June, the BBA published a consultation paper in response to concerns about LIBOR
accuracy, setting out several issues for discussion that could lead to more improved accuracy. After
reviewing comments from banks and others, the BBA decided to retain its existing process, although
it reiterated that LIBOR submissions should be “the rate at which each bank submits must be formed
from that bank’s perception of its cost of funds in the interbank market.”26
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Barclays and the LIBOR Scandal
Regulators
U.K. Financial Services Authority Prior to and through the financial crisis, the FSA was the
primary regulator for banks and other financial service firms in the U.K., which numbered 29,000 in
2012. It was an independent body, accountable to the U.K. Treasury and, through it, to Parliament.
The FSA had been given a wide range of rule-making, investigatory, and enforcement powers in
order to meet the four statutory objectives granted to it as part of the Financial Services and Markets
Act 2000 (see Table A below). Lord Adair Turner was appointed chairman of the FSA in 2008.
Table A
FSA’s Four Statutory Objectives
Market Confidence
Maintaining confidence in the U.K. financial system
Financial Stability
Contributing to the protection and enhancement of stability of the U.K.
financial system
Consumer Protection
Securing the appropriate degree of protection for consumers
The Reduction of Financial Crime
Reducing the extent to which it is possible for a regulated business to be
used for a purpose connected with financial crime
Source:
Statutory Objectives, FSA, http://www.fsa.gov.uk/pages/about/aims/statutory/index.shtml, accessed December
4, 2012.
The financial crisis that began in 2007 revealed flaws in the FSA’s regulation of the financial
industry, and sweeping changes were mandated by Parliament. Most important among them: the
Prudential Regulation Authority (PRA) would become part of the BoE, and the Financial Conduct
Authority (FCA) would replace the FSA in 2013.27
Bank of England28 The BoE was the U.K.’s central bank and had two basic mandates—
providing monetary stability and financial stability. Regulatory oversight of banks was not among its
responsibilities. In 2012, King was the BoE governor, and Paul Tucker was deputy governor in charge
of financial stability, appointed in March 2009. Tucker was seen as the odds-on favorite to become
BoE’s next governor when King stepped down as scheduled in 2013.29
Commodity Futures Trading Commission
The CFTC, created by Congress in 1974,
regulated the futures and option markets in the U.S. Its mission was to protect market users and the
public from fraud, manipulation, abusive practices, and systemic risk related to instruments that
were subject to the Commodity Exchange Act, and to foster open, competitive, and financially sound
markets.30 Gary Gensler, a former Goldman Sachs partner and U.S. Treasury official, was sworn in as
CFTC chairman in May 2009.
Barclays
Barclays plc was one of the largest banks in the world and the sixth-largest in Europe based on
total assets (see Exhibit 3 for the top banks and banking groups in Europe). It traced its origins back
to 1690, and for most of the next 300 years, Barclays was primarily a retail and commercial bank. By
2011, it had become a “universal bank,” engaged in retail, commercial lending, credit cards,
investment banking, wealth management, and investment management services.
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In 2011, Barclays had a total income of £32.3 billion (a 2.7% increase over 2010) with a net profit of
£4.0 billion (a 13.1% decrease from 2010) (see Exhibit 4 for Barclays’ income statement). Thirty-five
percent of Barclay’s total revenues came from its investment bank, known as “BarCap,” and of
BarCap’s total income, 51% came from trading. Prior to 2008, the investment banking business was
focused on debt trading and underwriting. However, when Lehman Brothers filed for bankruptcy in
September 2008, Barclays bought its U.S. business for $1.75 billion, giving BarCap substantial equities
and mergers and acquisitions (M&A) capabilities to add to its leading fixed-income business.31 Retail
banking (including business banking), which operated under the Barclays Bank name in the U.K.,
accounted for 16% of 2011 total income and 17.3% of 2011 total operating profit. Barclays’ retail
system was the top-ranked U.K.-based bank in terms of deposits,32 and according to one market
analysis, its retail bank was the seventh most-valuable bank brand in the world prior to the LIBOR
scandal (see Exhibit 5 for rankings based on brand value).33
Change at the Top
On January 1, 2011, American-born Robert Diamond took over as Barclays CEO. Diamond was
the oldest of nine children and the son of two teachers. He was a lecturer in business at the University
of Connecticut before turning to Wall Street. Attracted to bond trading, he joined Morgan Stanley and
moved up the ranks during his 13 years with the firm. Four years followed at Credit Suisse First
Boston, which he left to join Barclays in 1996, reportedly after a disagreement over his bonus, to
become head of the investment bank’s Global Markets division at a time when the investment bank
was struggling to compete as a full-service investment bank. A year later, Diamond became head of
BarCap, after Barclays disposed of its equities and M&A departments to concentrate on building its
debt markets and foreign exchange businesses.34
Under Diamond, BarCap grew in size, profitability, and stature (see Exhibit 6 for BarCap
financials, 2008 to 2011). With the firm’s takeover of the U.S. operations of Lehman Brothers, BarCap
reentered the M&A and equities businesses, providing it with the capabilities to compete with other
full-service firms like Goldman Sachs and JPMorgan Chase.35 In 2009 and 2010, BarCap ranked No. 3
in bond manager league tables based on number of issues, and had market shares of 7.7% and 7.9%,
respectively, based on total proceeds. 36 In M&A advising, BarCap worked on 82 deals in 2009 and 131
deals in 2010, ranking it No. 21 and No. 17, respectively, in league tables.37
Because of some combination of Diamond’s style, his compensation, and his national origin (he
became a dual U.S./U.K. citizen), he was a lightning rod for criticism among U.K. politicians.
Diamond, 59, had been one of Europe’s best-paid bankers and as such became the focus of anger in
Britain toward the industry’s big pay awards. While he had not taken a bonus in 2008 and 2009, he
had been paid £21 million in 2007.38 For 2010, he was the highest-paid banker in London, with a
compensation package of £10.1 million.39
In early 2010, a senior government minister, Peter Mandelson, branded Diamond the
“unacceptable face” of banking for his high compensation.40 When Diamond’s appointment as CEO
was announced in September 2010, the reaction from some British lawmakers was less than
favorable. The Financial Times reported:
This week, hackles rose among British politicians as one of the world’s highest-paid
investment bankers, Barclays’ Bob Diamond, was named as the UK group’s next chief
executive. . . . “Mr. Diamond illustrates in a particularly graphic way what happens when you
have an extremely high-paid head of an investment bank taking over one of these major
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Barclays and the LIBOR Scandal
international banks,” said a clearly peeved Vince Cable, business secretary in Britain’s
Conservative-Liberal Democrat coalition government. 41
Lord Oakeshott, the Liberal Democrat Treasury spokesman, described the appointment in less
than glowing terms: “He’s a great gambler but he has no experience of retail banking. Barclays
should be demerged. We have pledged to tackle unacceptable bonuses and reduce risk and ‘Bonus
Bob’ Diamond personifies both of those things.”42 Oakeshott said Barclays was “sticking two fingers
up” at the government.43
In January 2011, shortly after taking over as CEO, Diamond appeared before a Parliamentary
Committee and stirred up sentiment when he pushed back on the continued criticism of the banks
with respect to their responsibility for the financial crisis, saying, “There was a period of remorse and
apology for banks but I think that period needs to be over.” 44
Following Diamond’s ouster in 2012, former Barclays CEO Martin Taylor wrote in the Financial
Times that under Diamond’s leadership of BarCap, traders had manipulated and violated internal
guidelines that led to huge trading losses in 1998. “BarCap turned out to have an exposure
significantly beyond the country limit that had been established,” Taylor said. “It had marked some
Russian banking counterparties as Swiss or American and had blasted through the ceiling (limits on
amounts to be traded). [Diamond] maintained he had known nothing about what was going on. He
felt terrible. He loved Barclays. He offered to go. I concluded that the embryonic business that
BarCap then was would fall apart without him, and that he should stay.”45
The Financial Crisis
The financial crisis began to emerge in the U.K. during 2007, as the Newcastle-based bank,
Northern Rock, required substantial liquidity support from the BoE in September. This led to a fullscale “run on the bank,” with panicked customers lining up outside branches to withdraw their
savings. This was the first run on a U.K. bank since Victorian times.46,47 In early 2008, Northern Rock
was nationalized. Later in the year, the Royal Bank of Scotland and Lloyds Banking Group (the No. 1
and No. 6 banks, respectively, in the U.K. in 2008 based on total assets)48 were partly nationalized to
prevent their collapse.
In August 2007, Barclays twice drew on the BoE’s emergency lending facility, borrowing
approximately £1.6 billion the second time. Barclays explained that it had been forced to tap into the
BoE’s emergency credit line because of a technical glitch in its operations, discovering a capital
shortfall too late in the day to borrow in the open market.49 Using the BoE’s emergency line was a
very unusual event, and with the pervasive fear in the market more generally, it raised concerns
about Barclays’ liquidity and viability.
On September 3, 2007, Bloomberg featured Barclays in a news article titled “Barclays Takes a
Money-Market Beating,” speculating that Barclays may have been experiencing liquidity problems,
both because it used the BoE facility and because of Barclays’ relatively high LIBOR submissions in
sterling, euros, and U.S. dollars. The article posed the question, “So what the hell is happening at
Barclays and its Barclays Capital securities unit that is prompting its peers to charge it premium
interest in the money market?” Other newspapers, including the Financial Times and the Evening
Standard, ran similar articles. By November 2007, Barclays’ shares had fallen to three-year lows amid
fears over the bank’s vulnerability to the credit crunch.50
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Barclays Admits Its Violations
The Findings
With the announcement of the settlements between Barclays and the FSA, CFTC, and U.S.
Department of Justice (DOJ) individually on June 27 and 28, 2012, the bank acknowledged that it had
done two things wrong: (1) rate manipulation—between 2005 and 2009, it had submitted incorrect
LIBOR rates to generate profits or reduce losses for its derivative trading desk, and for the benefit of
traders at other banks, and (2) low-balling LIBOR—between 2007 and 2009, it had submitted LIBOR
rates that were lower than they should have been to try to avoid the perception that the bank was
financially weaker than its competitors. Because it was intended to represent a bank’s true cost of
borrowing in the open market, LIBOR was a critical metric used by the market and regulators to
gauge a firm’s financial health. The FSA, CFTC, and DOJ had worked in concert on the investigation,
part of a larger inquiry into the problems with LIBOR (and EURIBOR) that was initiated in 2008 by
the CFTC. Barclays was the first bank to acknowledge wrongdoing and to settle with the authorities.
The FSA, Barclays’ primary regulator, found the firm’s manipulation of its rate submissions had
violated several of the FSA’s “Business Principles” (see Exhibit 7). The violations centered on
submitting rates that were known not to be the best estimates of the bank’s true borrowing costs, as
influenced by the derivative traders and to avoid market scrutiny. In addition, Barclays failed to have
adequate risk management and control systems in place to prevent the fraudulent submissions; the
FSA noted that when LIBOR issues were escalated to Barclays’ compliance group on several
occasions in 2007 and 2008, the group did nothing to address the issues. Finally, the FSA found the
firm failed to adhere to the principles by not conducting its business with due care and diligence. 51
The FSA imposed a fine of £59 million ($93 million) on Barclays, its largest ever. However, the FSA
noted the bank’s excellent cooperation in the investigation, and because it had settled early, the
original penalty of £85 million was discounted by 30%.52
Because LIBOR was widely used in derivative contracts that traded on U.S. exchanges and with
U.S. participants in the OTC market, the CFTC also had regulatory jurisdiction over the bank. The
CFTC investigation found improper behavior and actions identical to those articulated by the FSA,
with Barclays acknowledging that it violated the Commodity Exchange Act by knowingly
manipulating and falsely reporting its rate submissions. The CFTC imposed a penalty of $200 million
and also noted the “significant cooperation” that it received from the firm in its investigation. 53
The DOJ had been pursuing a fraud charge against Barclays and agreed not to criminally
prosecute the firm if it complied with CFTC requirements that Barclays strengthen its compliance and
internal control systems.54 Barclays also paid a penalty of $160 million to settle with the DOJ. In its
settlement agreement, the DOJ wrote:
Barclays was the first bank to cooperate in a meaningful way in disclosing its conduct
relating to LIBOR and EURIBOR. Its disclosure included relevant facts that at the time had not
come to the government’s attention. Barclays’s cooperation has been of substantial value in
furthering the Fraud Section’s investigation. . . . From the outset of the investigation to the
present, Barclays’s cooperation has been extraordinary and extensive, in terms of the quality
and type of information and assistance provided.55
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The Money Market Desk
Like many other banks, Barclays delegated responsibility for determining its cost of borrowing in
various currencies and maturities to its Money Market Desk (Desk). As such, the Desk was
responsible for submitting LIBOR (and EURIBOR) rates to Thomson. Among other tasks, the Desk
helped manage the liquidity needs of the bank, acting as a central clearing place for all the groups
within the firm that needed funds and had excess liquidity; the Desk would turn to the open market
to source liquidity and to lend it, both intraday and overnight. Through its management of the firm’s
liquidity needs, it was best positioned to judge the firm’s cost of borrowing, even if it was in a
position of excess liquidity and not borrowing on a given day. The Desk, and its brethren across the
financial industry, was best thought of as a “utility,” performing a low-return, low-cost service for
other businesses within Barclays. The Desk was located on the same trading floor with the derivative
traders.
Rate Manipulation
The investigation found that from at least mid-2005 through the fall of 2007, and sporadically
thereafter into 2009, derivative traders, located primarily in New York and London, regularly
requested that the Desk submit a particular rate or adjust its submitted rates higher or lower in an
attempt to affect the rate at which LIBOR was set, generally in the one- and three-month maturities.56
Barclays’ derivative traders were trying to improperly benefit their own trading positions and the
profitability of their particular trading books and desks.b As an example, in one e-mail, a derivative
trader sent to the Desk a request for a low submission for three-month LIBOR because of rate setting
on a LIBOR-based futures contract traded on one of the exchanges within the CME: “We have an
unbelievably large set on Monday (the IMM). We would need a really low 3m fix, it potentially could
cost us a fortune. We would really appreciate any help.”57
The regulators did not quantify the gains (or avoided losses) that the traders were presumed to
have made, nor did they provide evidence that trader compensation was affected.
Many OTC interest rate derivatives were based on exchanging (“swapping”) one set of interest
payments for another. For example, one such transaction might have one party exchanging a set of
fixed payment obligations (10% per annum on the “notional amount” of the swap for 10 years) for a
set of floating payment obligation (three-month LIBOR plus 100 basis points [bp] on the notional
amount for 10 years)—a “fixed/floating interest rate swap.”c In the majority of these swaps in the
market, LIBOR was used as a benchmark for the floating interest rate. On the days when the floating
rate would be reset (e.g., monthly, quarterly), a lower LIBOR rate would mean a lower payment by
the floating rate payer, and a higher LIBOR would mean a higher payment by the floating rate payer.
LIBOR-based exchange-traded futures contracts were often used by derivatives traders to hedge OTC
derivative positions, and changes in the rate on the days when the LIBOR-based futures contracts
were set could also affect the profitability of a trader’s position.
The derivative traders generally asked the Desk to adjust its LIBOR submissions by a few basis
points.58,d Changing the submission did not guarantee that the LIBOR rate that was actually set
b The bulk of the activity was in U.S. dollar LIBOR, but it also occurred in EURIBOR, yen, and sterling LIBOR.
c The floating rate payer (fixed-rate receiver) might have issued fixed-rate debt and for any number of reasons preferred that
the obligation be floating rate.
d A “basis point” was 1/100 of 1%.
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would be altered, but that was the goal, and it could be accomplished either by having the Barclays’
manipulated rate get thrown out as an outlier, thereby causing another bank’s rate that would
otherwise have been thrown out to be included, or by having the manipulated Barclays rate included
in the “trimmed mean” calculation. If the manipulated Barclays submission caused one of the eight
remaining rates to be one bp different from the correct rate, then the effect would be an actual LIBOR
rate that was different by one-eighth of one bp (as there were eight firms in the “trimmed mean”
calculation of the actual LIBOR rate).
The U.S. dollar (and other currency) volumes to which the actual LIBOR rates were applied could
be substantial. At year-end 2007, Barclays had about $18 trillion in notional value of U.S. dollar
interest rate swaps outstanding, and about $1 trillion in face value of exchange-traded interest rate
futures contracts.59,e While not all of these swaps involved a floating rate leg, and not all involved
LIBOR, most did. It appeared that Barclays’ derivative traders focused their request at times when
they had substantial U.S. dollar amounts of the floating rate legs of a swap that were resetting. For
example, in one e-mail, a Barclays derivative trader told the Desk that he needed a “very very low 3m
fixing on Monday (because he had) 80 yards”—market slang for $80 billion—resetting. In this case, if
the trader were successful in changing the actual LIBOR rate by one-eighth of one bp, it would result
in an additional $2.5 million of profit.f Between 2005 and 2007, the FSA and CFTC identified at least
173 instances where 14 different Barclays’ derivative traders (including senior traders and managers)
asked the Desk to manipulate the U.S. dollar LIBOR, and in 70% of the time, the Desk submitted
LIBOR rates consistent with the traders’ requests.60 There were 58 requests to manipulate EURIBOR;
over 80% of the time submitters put in rates that were consistent with the traders’ requests.61 The
investigation found that there was no effort on the part of the derivative traders or the Desk to
conceal their discussions with respect to the manipulation, which occurred over e-mail, the phone,
and in face-to-face conversations on the trading floor.
Barclays’ swaps traders also facilitated the desire of former Barclays swaps traders to alter LIBOR
submissions by passing along the former traders’ requests to the Money Market Desk as if they were
their own.62 At least 12 of the U.S. dollar LIBOR requests were made on behalf of traders previously
employed at Barclays who were working at other banks that were not submitting rates for LIBOR.63
In addition, Barclays’ traders tried to influence LIBOR and EURIBOR submissions at other banks via
traders at those firms. Sixty-three requests went to external traders to pass on to their submitters
between February 2007 and October 2007.64
In September 2007, Barclays’ managers raised concerns about the improper requests from the
derivatives traders to the Desk. The issues were raised with the compliance function at that time and
again in December, but the group concluded that there was nothing inherently inappropriate about
the Desk having knowledge of the exposure other groups within the firm had to LIBOR and
e
The notional value of a derivative was the spot market value of the assets underlying that derivative. For
example, consider a “fixed/floating” interest rate swap on a “notional” $100 million of debt. In this transaction,
one party agreed to pay to the other on a quarterly basis the then-current U.S. dollar value of the 3-month LIBOR
rate on $100 million. In exchange for this payment of floating rate interest, the other party agreed to pay the U.S.
dollar value of the interest rate on a 10-year U.S. Treasury note on $100 million of debt. (Unlike the LIBOR
payment, the fixed Treasury payment never changed during the term of the swap, and was pegged to the market
Treasury rate at the inception of the transaction.) The notional value of this swap was $100 million, the reference
amount on which each party’s quarterly payments to the other was based. (Source: Clayton S. Rose and David
Lane, “Lessons Learned? Brooksley Born & the OTC Derivatives Market (A).” HBS No. 311-044 [Boston: Harvard
Business Publishing, 2010].)
f = .0001 X 0.125 X $80 billion X 0.25 (one basis point X one of eight firms X notional amount X reset of 3-month LIBOR).
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EURIBOR rates. They did view it as inappropriate for the Desk to consider any requests from
derivative traders in determining what rates to submit. However, they did not discuss these issues
with the submitters on the Desk, nor did they draft any policies or procedures relating to this
conflict.65 The regulators found no evidence that Barclays senior management was aware of this ratesubmission manipulation.
Zero Sum Game?
While the requests may have benefited an individual trader’s position, given the complexity of
Barclays’ aggregate funding needs, it was far from clear that the firm benefited from any change in
rates.66 In addition, there were trillions of dollars of assets and matching liabilities with their value
tied to LIBOR (as well as hundreds of trillions of dollars in derivative contracts) that were held by or
owed to households, investment firms, corporations, and governments. For one side of these
transactions (e.g., a homeowner with a mortgage) where the payer would benefit from a LIBOR that
was set lower than otherwise because of manipulation, there was the other side that lost money it
was legitimately owed (e.g., a pension fund investing in a mortgage-backed security).
Low-balling LIBOR
At various points from August 2007 through January 2009, Barclays submitted rates to Thomson
that it knew to be below its presumed cost of borrowing in order to manage the market’s perception
of its financial viability; the goal was to not have a higher submission than peer firms, which would
have indicated a higher borrowing cost and potentially more limited access to vital liquidity. The
rates were manipulated by as little as a few bp, but often it was more than 20 bp and as high as 50
bp.67 Managers in the Treasury Department and on the Desk directed that the U.S. dollar LIBOR
submitted be closer to the expected rates of other panel banks.68 These managers instructed that the
Barclays U.S. dollar LIBOR submissions not be an “outlier” compared to other panel banks; Barclays
could be “at the top of the pack” but not too far above the next-highest contributor.69 Barclays often
submitted rates that were not outliers compared to the other panel banks, but were nevertheless
higher than the rates included in the average for the LIBOR fix. Barclays employees stated in internal
communications that the purpose of the strategy of underreporting submissions for U.S. dollar
LIBOR was to keep Barclays’ “head below the parapet” so that it did not get “shot off.”70
On December 4, 2007, a Barclays LIBOR submitter sent an internal e-mail that raised concerns
about the U.S. dollar LIBOR rates submitted by panel banks, including Barclays. The banks had
submitted a rate for a one-month U.S. dollar LIBOR that was lower than if they had been “given a
free hand” in determining Barclays’ borrowing cost. The e-mail went on to express concern that the
panel banks’ submissions, including Barclays’, were false.71
On December 6, Barclays raised its concerns about systemically improper rate submissions with
the FSA, although it did not inform the FSA of Barclays’ own incorrect submissions. The compliance
manager who discussed the issue with the FSA then summarized the conversation in an internal email to several members of Barclays’ management. He said that the FSA was told that the one-month
to three-month U.S. dollar LIBOR settings seemed incorrect and that Barclays had consistently been
the highest (or one of the two highest) rate provider in recent weeks, but was reluctant to go higher,
given its recent media experience.72
In their findings, the regulators concluded that “less senior managers” in the Treasury and on the
Desk ordered the lower rate submissions because of ongoing concerns expressed by Barclays’ senior
management over the press reports and market speculation about the firm’s financial health and
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signals that a high LIBOR submission suggested. One employee responsible for the submissions told
a colleague that there were “internal political pressures on him not to set the rate higher.”73 The
investigation was unable to find evidence, before late October 2008, that the firm’s senior
management had ordered the lower rate submissions or was aware they were taking place.
The Phone Call
For the first nine months of 2008, Barclays’ U.S. dollar LIBOR rate submissions were close to the
actual fixed LIBOR rate and comfortably below the higher submissions; however, in late September,
its submissions again started getting significantly higher than those of the other panel banks, which
prompted a call on October 29 from the BoE’s Tucker to Diamond, then head of BarCap.
The call took place against the full-throated onset of the financial crisis. Lehman Brothers had filed
for bankruptcy, and shortly thereafter AIG had received a bailout from the U.S. Federal Reserve.
Merrill Lynch was sold to Bank of America, and Goldman Sachs and Morgan Stanley became bank
holding companies to ensure they had access to liquidity.74 A large U.S. money market fund, the
Reserve Primary Fund, “broke the buck,” creating panic and forcing the U.S. government to
guarantee all money market fund holdings. The crisis was not limited to the U.S.; it was global and
included the U.K. The credit markets had been virtually shut down, and banks and other financial
institutions found it very challenging to obtain funding.
Following the call from Tucker, Diamond sent an e-mail to Barclays CEO, John Varley, copying
Jerry del Missier, then BarCap’s chief operating officer, which chronicled the conversation:
Further to our last call, Mr Tucker reiterated that he had received calls from a number of
senior figures within Whitehallg to question why Barclays was always toward the top end of
the Libor pricing. His response was “you have to pay what you have to pay”. I asked if he
could relay the reality, that not all banks were providing quotes at the levels that represented
real transactions, his response “oh, that would be worse”.
I explained again our market rate driven policy and that it had recently meant that we
appeared in the top quartile and on occasion the top decile of the pricing. Equally I noted that
we continued to see others in the market posting rates at levels that were not representative of
where they would actually undertake business. This latter point has on occasion pushed us
higher than would otherwise appear to be the case. In fact, we are not having to “pay up” for
money at all.
Mr Tucker stated the levels of calls he was receiving from Whitehall were “senior” and that
while he was certain we did not need advice, that it did not always need to be the case that we
appeared as high as we have recently. 75
What Was Really Said?
When Diamond testified before the Treasury’s Select Committee in 2012, he said that he did not
take from the conversation that Tucker was directing Barclays to lower its rate submissions. Tucker
agreed and told the committee that the key message he wished to convey to Diamond was to make
“sure that the senior management of Barclays was overseeing the day-to-day money market
operations, treasury operations and funding operations of Barclays so that Barclays’ money desk did
g “Whitehall” referred to the U.K. government.
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not inadvertently send distress signals.” 76 Tucker told the committee that no government minister
asked him to “lean on” Barclays over its LIBOR submissions, but he did reveal the BoE had feared, at
the time, that Barclays would need a bailout. 77
While Diamond did not take Tucker’s words as an instruction to lower the firm’s LIBOR
submission, del Missier did. Del Missier had worked closely with Diamond at BarCap for many
years. He became BarCap’s president when Diamond became the firm’s CEO.
Del Missier told the committee that he had spoken with Diamond on October 29 and took from
that conversation that the BoE was getting “pressure from Whitehall around Barclays—the health of
Barclays—as result of the LIBOR rates, that we should get our LIBOR rates down, and we should not
be outliers. . . . What was communicated to me by Mr. Diamond was . . . about political pressure on
the bank, regarding Barclays’ health and, as indicated by our LIBOR rates, that we should get our
LIBOR rates down, and not be outliers.” 78 As a result, he “passed the instructions as I had received it,
onto the head of the money markets desk.” When asked whether he believed he was “acting on an
instruction from the Bank of England or from other Whitehall [government officials] sources,” del
Missier replied, “yes.”79 (See Exhibit 8 for Barclays’ LIBOR submissions in British sterling before and
after the telephone call.)
Barclays’ rate submissions were lowered as a result of del Missier’s order, until November 6 when
there was a massive and coordinated effort by global central banks to flood the financial system with
liquidity to ease the funding needs of banks.80
Fallout
In a letter sent on June 28, 2012, to the chair of the Treasury Select Committee, Diamond
acknowledged that the rate manipulation for the benefit of the derivative traders was “wholly
inappropriate,” although he blamed it on a handful of individuals. In his testimony before the
committee, he said, about this situation, “I am sorry, angry and disappointed.”81 He also said in his
letter, regarding the efforts to manage media and market speculation about Barclays’ financial health,
“I accept that the decision to lower rates was wrong,” but he pointed out that the motivation was to
protect the bank’s reputation, not generate profits. 82 Barclays announced that Diamond, del Missier,
and two other senior managers would forgo their bonuses for the year, but in the days that followed,
the publication of the FSA’s settlement (the “Final Notice”), there was much commentary in the U.K.
media to the effect that surrendering their bonuses was not enough.83
Diamond ignored growing calls for his ouster, insisting he would not resign. Barclays chairman,
Marcus Agius, did, however, step down on July 2, 2012, saying, “The buck stops with me and I must
acknowledge responsibility by standing aside.”84 (He also resigned as chairman of the BBA.)
Barclays’ board, The Economist reported, had apparently “decided that the chairman is dispensable,
and Mr. Diamond is not.”85
On July 2, BoE Governor King summoned Agius and Michael Rake, the firm’s senior independent
director, to a meeting. Agius outlined the ensuing discussion between the three men: “[I]t was made
very plain to us that Bob Diamond no longer enjoyed the support of his regulators. The Governor
was very careful to say that he had no power to direct us, but he felt that this was sufficiently
important, as indeed it was, for us to be told in absolute terms what the situation was.”86 After the
meeting, Agius met with Diamond, who resigned the next day. Del Missier, who had been made the
bank’s COO on June 22, also resigned on July 3.
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On November 27, 2012, the BoE announced that Mark Carney, the sitting governor of Canada’s
Central Bank, would succeed King as the BoE’s next governor, beginning on June 1, 2013. He would
be the first non-U.K. citizen to assume this role in the bank’s history. 87
The Future of LIBOR
On September 28, 2012, a report commissioned by the U.K.’s Chancellor of the Exchequer was
issued by Martin Wheatley. While it concluded that LIBOR should remain a global benchmark based
on the cost of unsecured inter-bank lending, it set forth a series of proposed reforms for the LIBOR
rate-setting process. Wheatley, the FSA’s managing director responsible for the Consumer and
Markets Business Unit, was the CEO-designate of the new regulatory body, the Financial Conduct
Authority. These reforms, which were accepted by the government and were to be adopted, included:
1) The administration of LIBOR should be subject to statutory authority, creating specific law to
govern the process by which LIBOR is managed and set;
2) The oversight of the rate setting process should move from the BBA to a new Administrator to
be chosen by a body appointed by the government;
3) Submitting banks should use market data in determining the rates submitted, and that data
should be available and transparent;
4) The LIBOR Administrator should develop a code of conduct for submitting banks;
5) The BBA and new Administrator should not set LIBOR for currencies and/or maturities for
which there is insufficient market data; and,
6) The rates each bank submitted daily should not be published immediately, but should be
embargoed for 3 months.88
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Exhibit 1
British Banking Association Snapshot, 2012
What did the BBA do?
Influencing decision makers: It promoted a legislative and regulatory system for banking and financial services—in
the U.K., Europe, and internationally—which took account of its members’ needs and concerns and provided an
effective and competitive market place in which their businesses could prosper.
Promoting and defending the industry: BBA engaged with government, devolved administrations and Europe as
well as the media and other key stakeholders to ensure the industry’s voice is heard and to highlight the strength
and importance of U.K. banking.
Who did the BBA represent?
It represented over 200 banks. These member banks collectively provided the full range of banking and financial
services and made up the world’s largest international banking center, operating some 150 million accounts and
contributing £50 billion annually to the UK economy.
The BBA also represented 70 Associate member firms. These firms enjoyed many benefits of BBA membership,
including access to up-to-the-minute information about key industry developments and also the ability to
directly contact BBA policy directors should specialist help be required.
How was the BBA governed?
The BBA was governed by its board, which met 4 times a year and comprised the BBA chief executive and the
chief executives of the largest banks operating in the U.K., both retail, wholesale and from overseas. The board
represented the whole of the BBA membership. Senior executives on the board came from: Barclays, BNP Paribas,
Citibank NA, Credit Suisse, Deutsche Bank AG, Hampshire Trust plc, HSBC Bank plc, J.P. Morgan Europe Ltd,
Lloyds Banking Group, Santander UK plc, Standard Chartered Bank, The Royal Bank of Scotland plc.
Source: British Bankers Association, http://www.bba.org.uk/about-us, accessed December 3, 2012.
Exhibit 2
Source:
The LIBOR Rate-Setting Process
British Bankers Association, http://www.bbalibor.com/bbalibor-explained/the-basics, accessed December 3, 2012.
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Exhibit 3
Top Banks and Banking Groups in Europe Based on Total Assets, 2011
Rank
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
Source:
313-075
Total Assets
(€ trillions)
Firm
Country
Deutsche Bank
HSBC Holdings
BNP Paribas
Credit Agricole Group
Royal Bank of Scotland
Barclays PLC
ING Group
Santander Group
Societe Generale
UBS
Lloyds Banking Group
Groupe BPCE
UniCredit Group
Credit Suisse Group
Rabobank Group
Germany
U.K.
France
France
U.K.
U.K.
Netherlands
Spain
France
Switzerland
U.K.
France
Italy
Switzerland
Netherlands
€2.164
1.973
1.965
1.880
1.872
1.877
1.282
1.252
1.181
1.166
1.165
1.138
0.927
0.861
0.732
BanksDaily.com, http://banksdaily.com/topbanks/Europe/2011.html, accessed October 5, 2012.
Exhibit 4
Barclays PLC Income Statement, 2007 to 2011 (£ million)
2011
2010
2009
2008
2007
Net interest income
£12,201
£12,523
£11,918
£11,469
£9,598
Noninterest income
20,091
18,917
17,205
9,730
11,446
Net income net of insurance claims
32,292
31,440
29,123
21,199
21,044
Credit impairment charges and other provisions
(3,802)
(5,672)
(8,071)
(5,419)
(2,795)
Impairment of investment in BlackRock, Inc.
(1,800)
--
--
--
(20,777)
(19,971)
(16,715)
(13,391)
(34)
268
248
2,747
70
5,879
6,065
4,585
5,136
6,223
(1,928)
(1,516)
(1,074)
( 453)
(1,699)
3,951
4,549
3,511
4,683
4,524
--
--
6,777
604
571
£3,951
£4,549
£10,288
£5,287
£5,095
Operating expenses
Other
Profit before tax
Tax
Profit after tax from continuing operations
Profit for the year from discontinued operations,
including gain on disposal
Total profit
Source:
-(12,096)
Barclays PLC, 2011 Annual Report, p. 164, http://group.barclays.com/Satellite?blobcol=urldata&blobheader=
application%2Fpdf&blobheadername1=Content-Disposition&blobheadername2=MDT-Type&blobheadervalue1=
inline%3B+filename%3D2011-Barclays-PLC-Annual-Report-%28PDF%29.pdf&blobheadervalue2=abinary%3B+
charset%3DUTF-8&blobkey=id&blobtable=MungoBlobs&blobwhere=1330686323829&ssbinary=true,
accessed
December 6, 2012.
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Exhibit 5
Barclays Retail Brand Ranking, Based on Brand Value
Source:
Statista 2011, http://www.statista.com.ezp-prod1.hul.harvard.edu/statistics/185050/worldwide-most-valuablebanking-brands/, accessed October 4, 2012.
Note:
The methodology employed used a discounted cash flow (DCF) technique to discount estimated future royalties, at
an appropriate discount rate, to arrive at a net present value (NPV) of the trademark and associated intellectual
property: the brand value. Said another way, brand value was the net present value of the estimated future cash
flows attributable to the brand. Source: Brand Finance, “The annual report on the world’s most valuable banking
brands,” February 2012, p. 72, http://www.brandfinance.com/images/upload/best_global_banking_brands_
2012_dp.pdf, accessed December 6, 2012.
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Exhibit 6
313-075
Barclays Capital Financials, 2008 to 2011
2011
2010
2009
2008a
£1,177
3,026
5,264
873
(5)
£1,121
3,347
7,986
752
3
£1,598
3,001
7,185
(164)
5
£1,724
1,429
1,506
559
13
10,335
13,209
11,625
5,231
(93)
10,242
(7,289)
12
(543)
12,666
(8,295)
18
(2,591)
9,034
(6,592)
22
(2,423)
2,808
(3,774)
6
2,262
£2,965
£4,389
£4,284
£1,302
6,325
1,751
2,027
232
8,687
2,040
2,243
239
13,652
2,165
2,188
(143)
(4,417)
(1,820)
7,353
1,153
1,053
299
(6,290)
1,663
£10,335
£13,209
Income Statement Information (£ mil)
Net interest income
Net fees and commission income
Net trading income
Net investment income(loss)
Other income
Total income
Credit impairment charges and other provisions
Net operating income
Operating expense
Share of post-tax results of associates and joint ventures
Gain on acquisition
Profit before tax
Analysis of Total Income (£ mil)
Fixed income, currency and commodities
Equities and Prime Services
Investment banking
Principal investments
Credit market losses in income
Own credit
Total income
Source:
£11,625
£5,231
Various Barclays Full Year Results Announcements. “2009,” http://group.barclays.com/about-barclays/
investor-relations/financial-results-and-publications/results-announcements; “2010,”
http://group.barclays.com/Satellite?blobcol=urldata&blobheader=application%2Fpdf&blobheadername1=ContentDisposition&blobheadername2=MDT-Type&blobheadervalue1=inline%3B+filename%3DBarclays-PLC-Full-YearResults-Announcement-2010.pdf&blobheadervalue2=abinary%3B+charset%3DUTF8&blobkey=id&blobtable=MungoBlobs&blobwhere=1330686359738&ssbinary=true; and “2011,”
http://group.barclays.com/Satellite?blobcol=urldata&blobheader=application%2Fpdf&blobheadername1=ContentDisposition&blobheadername2=MDT-Type&blobheadervalue1=inline%3B+filename%3DBarclays-PLC-Full-YearResults-Announcement-2011.pdf&blobheadervalue2=abinary%3B+charset%3DUTF8&blobkey=id&blobtable=MungoBlobs&blobwhere=1330686358233&ssbinary=true.
a2008 results are not restated for 2009 acquisition of Lehman Brothers.
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Exhibit 7
U.K.’s FSA Principles for Business
1 Integrity
A firm must conduct its business with integrity.
2 Skill, care and diligence
A firm must conduct its business with due skill, care and diligence.
3 Management and control
A firm must take reasonable care to organise and control its affairs
responsibly and effectively, with adequate risk management systems.
4 Financial prudence
A firm must maintain adequate financial resources.
5 Market conduct
A firm must observe proper standards of market conduct.
6 Customers' interests
A firm must pay due regard to the interests of its customers and treat them
fairly.
7 Communications with clients
A firm must pay due regard to the information needs of its clients, and
communicate information to them in a way which is clear, fair and not
misleading.
8 Conflicts of interest
A firm must manage conflicts of interest fairly, both between itself and its
customers and between a customer and another client.
9 Customers: relationships of trust
A firm must take reasonable care to ensure the suitability of its advice and
discretionary decisions for any customer who is entitled to rely upon its
judgment.
10 Clients' assets
A firm must arrange adequate protection for clients' assets when it is
responsible for them.
11 Relations with regulators
A firm must deal with its regulators in an open and cooperative way, and must
disclose to the FSA appropriately anything relating to the firm of which the
FSA would reasonably expect notice.
Source:
FSA Handbook, http://fsahandbook.info/FSA/html/handbook/PRIN/2/1, accessed December 5, 2012.
Exhibit 8
Source:
Barclays’ LIBOR Submissions, June 2008 to December 2008
Andrew Trotman, “Bob Diamond questioned by MPs on Barclays Libor scandal: as it happened,” The Telegraph,
July 4, 2012, http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/9374516/Bob-Diamondquestioned-by-MPs-on-Barclays-Libor-scandal-as-it-happened.html, accessed September 13, 2012. Used with
Permission of Bloomberg L.P. Copyright © 2013. All rights reserved.
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Endnotes
1
“Barclays fined for attempts to manipulate Libor rates,” BBC News, June 27, 2012, http://www.bbc.
co.uk/news/business-18612279, accessed September 14, 2012.
2 “Timeline: Barclays widening Libor-fixing scandal,” BBC News, http://www.bbc.co.uk/news/business18671255?print=true, accessed September 20, 2012.
3 Larry Elliott and Jill Treanor, “Barclays: Diamond’s defensive batting leaves MPs none the wiser: Ex-CEO
tells 3-hour select committee hearing of anger, shock—and love for Barclays,” The Guardian, July 5, 2012, via
Factiva, accessed December 18, 2012.
4 Economist Intelligence Unit, “The LIBOR scandal: The rotten heart of finance,” Executive Briefing, July 9,
2012, via Factiva, accessed September 14, 2012.
5 House of Commons Treasury Committee, “Fixing LIBOR: some preliminary findings, Second Report of
Session 2012–13,” Volume I, p. 8.
6
“CEO Ruffles Lawmakers By Using Their First Names,” National Public Radio, July 5, 2012,
http://www.npr.org/2012/07/05/156325909/ceo-ruffles-lawmakers-by-using-their-first-names,
accessed
September 13, 2012.
7 Landon Thomas Jr., “Trade Group for Bankers Regulates a Key Rate,” New York Times, July 5, 2012,
http://www.nytimes.com/2012/07/06/business/global/the-gentlemens-club-that-sets-libor-is-called-intoquestion.html?pagewanted=all, accessed September 17, 2012.
8
“Welcome to bbalibor,” http://www.bbalibor.com/bbalibor-explained/faqs, accessed September 20, 2012.
9
U.S. Department of Justice, Statement of facts, June 26, 2012, http://www.justice.gov/iso/opa/
resources/9312012710173426365941.pdf, accessed October 30, 2012.
10
Ibid.
11
“CFTC Orders Barclays to pay $200 Million Penalty for Attempted Manipulation of and False Reporting
concerning LIBOR and Euribor Benchmark Interest Rates,” CFTC Press Release 6289-12, June 27, 2012,
http://www.cftc.gov/PressRoom/PressReleases/pr6289-12, accessed September 18, 2012.
12
Ibid.
13
Thomas Jr., “Trade Group for Bankers Regulates a Key Rate.”
14
British Bankers Association, http://www.bbalibor.com/bbalibor-, accessed September 13, 2012.
15
U.S. Department of Justice, Statement of facts, June 26, 2012, http://www.justice.gov/iso/opa/
resources/9312012710173426365941.pdf, accessed October 30, 2012.
16 Financial Services Authority, FSA Reference Number: 122702, Final Notice to Barclays Bank, June 27, 2012,
pp. 6-7, http://www.fsa.gov.uk/static/pubs/final/barclays-jun12.pdf, accessed September 24, 2012.
17
“Welcome to bbalibor.”
18
“What is Euribor,” http://www.euribor-rates.eu/what-is-euribor.asp, accessed December 4, 2012.
19
Gillian Tett, “Libor’s value is called into question,” Financial Times, September 25, 2007, http://www.ft.
com/intl/cms/s/0/8c7dd45e-6b9c-11dc-863b-0000779fd2ac.html#axzz2FQveRW00, accessed December 18, 2012.
20 House of Commons Treasury Committee, “Fixing LIBOR: some preliminary findings, Second Report of
Session 2012–13,” Volume I, p. 25.
21
Ibid, p. 26.
22
U.S. Department of Justice, Statement of facts, June 26, 2012, p. 18.
23
“Recent Concerns Regarding LIBOR’s Creditability,” Markets Group, Federal Reserve Bank of New York,
May 20, 2008, http://www.newyorkfed.org/newsevents/news/markets/2012/libor/MarketSource_Report_
May202008.pdf, accessed September 13, 2012.
24
Ibid.
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25
“Ben Bernanke and Mervyn King describe Libor fixing as ‘fraud’,” The Guardian, July 17, 2012,
http://www.guardian.co.uk/business/2012/jul/17/federal-reserve-ben-bernanke, accessed September 14, 2012.
26
FSA Final Notice, FSA Reference Number: 122702, June 27, 2012, p. 30.
27
“Regulatory Reform,” FSA, http://www.fsa.gov.uk/about/what/reg_reform/background, accessed
November 1, 2012.
28
“About the Bank,” The Bank of England, http://www.bankofengland.co.uk/about/Pages/default.aspx,
accessed September 18, 2012.
29
David Milliken and Sven Egenter, “Will Tucker get Bank of England top job?” Reuters News, July 12, 2012,
http://www.reuters.com/article/2012/07/12/us-britain-boe-idUSBRE86B0KO20120712, accessed October 4,
2012.
30
“Mission and Responsibilities,” U.S. Commodity Futures Trading Commission, http://www.cftc.gov/
About/MissionResponsibilities/index.htm, accessed September 18, 2012.
31
“The Makings of Barclay Capital,” Financial Times, http://www.ft.com/intl/cms/f4c8dc78-2ded-11dfa971-00144feabdc0.swf?width=825&height=570&bgcolor=.
32 Bankscope, https://bankscope2-bvdep-com.ezp-prod1.hul.harvard.edu/version-20121116/Report.serv?_
CID=99&context=X6OJ8D2A3EY9ZYD&SeqNr=2, accessed December 5, 2012.
33
Statista 2011, http://www.statista.com.ezp-prod1.hul.harvard.edu/statistics/185050/worldwide-mostvaluable-banking-brands/, accessed October 4, 2012
34 Steve Slater, “NEWSMAKER-Patience pays as Diamond grabs top Barclays job,” Reuters News, September
7, 2010, via Factiva, accessed September 13, 2012.
35
Ibid.
36
Data taken from Thomson Financial, accessed December 5, 2012.
37
Ibid.
38
Slater, “NEWSMAKER-Patience pays as Diamond grabs top Barclays job.”
39
Jon Menon, “Barclays May Pay Diamond as Much as $16.5 Million in Salary, Bonus, Stock,” Bloomberg,
March 7, 2011, http://www.bloomberg.com/news/2011-03-07/barclays-awards-diamond-11-million-bonus2011-salary-increases-fivefold.html, accessed December 18, 2012.
40
Landon Thomas Jr. and Mark Scott, “A Chief With Flair Falls From His Perch,” New York Times DealBook,
July 3, 2012, http://dealbook.nytimes.com/2012/07/03/a-chief-with-flair-falls-from-his-perch/, accessed
December 3, 2012.
41 Patrick Jenkins, Edward Luce, George Parker, and Francesco Guerrera, “Banks and politics: Commanding
heights,” Financial Times, September 10, 2010, via Factiva, accessed September 13, 2012.
42
Kamal Ahmed, “The Case for the Defence,” Sunday Telegraph, September 12, 2010, via Factiva, accessed
September 13, 2012.
43
Jenkins et al., “Banks and politics.”
44
Jill Treanor, “Bob Diamond stands firm against MPs’ calls he forgo his bonus,” The Guardian, January 11,
2011,
http://www.guardian.co.uk/business/2011/jan/11/bob-diamond-stands-firm-mp-bonus,
accessed
September 4, 2012.
45
Jill Treanor, “Former Barclays boss regrets not sacking Bob Diamond 15 years ago,” The Guardian, July 9,
2102,
http://www.guardian.co.uk/business/2012/jul/09/barclays-bob-diamond-martin-taylor,
accessed
September 17, 2012.
46
Philip Inman, “MPs blame watchdog for Northern Rock,” The Guardian, January 25, 2008,
http://www.guardian.co.uk/business/2008/jan/26/northernrock.creditcrunch, accessed September 20, 2012.
47
“Timeline: Barclays widening Libor-fixing scandal,” BBC News, http://www.bbc.co.uk/news/business18671255?print=true, accessed September 20, 2012.
20
This document is authorized for use only by Ahmed Alhadaithi in 2017.
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Barclays and the LIBOR Scandal
313-075
48
“Top 100 Banks in the World—2008 Assets,” http://www.relbanks.com/worlds-top-banks/assets-2008,
accessed December 19, 2012.
49
“Barclays blames glitch for cash shortfall,” Morning Star Online, August 31, 2007, via Factiva, accessed
September 13, 2012.
50 Bill Gleeson, “Barclays hits a three-year low,” Daily Post (Liverpool), November 6, 2007, via Factiva,
accessed September 13, 2012.
51
FSA Final Notice, FSA Reference Number: 122702, June 27, 2012, pp. 2–4.
52
Ibid, p. 1.
53 U.S.
Commodity and Futures Trading Commission, CFTC Docket No. 12 – 25, June 27, 2012, pp. 4, 30.
54
U.S. Department of Justice, http://www.justice.gov/iso/opa/resources/337201271017335469822.pdf,
accessed October 30, 2012.
55
Ibid.
56
U.S. Commodity and Futures Trading Commission, CFTC Docket No. 12 – 25, June 27, 2012, p. 3.
57
FSA Final Notice, FSA Reference Number: 122702, June 27, 2012, p. 12.
58
Ibid.
59 Barclays plc, 2007 Annual Report, p. 188, http://group.barclays.com/Satellite?blobcol=urldata&
blobheader=application%2Fpdf&blobheadername1=Content-Disposition&blobheadername2=MDT-Type&
blobheadervalue1=inline%3B+filename%3D2007-Barclays-PLC-Annual-Report-(PDF).pdf&blobheadervalue2=
abinary%3B+charset%3DUTF-8&blobkey=id&blobtable=MungoBlobs&blobwhere=1330687297639&ssbinary=
true, accessed December 26, 2012
60 FSA
Final Notice, FSA Reference Number: 122702, June 27, 2012, p. 14.
61
Ibid.
62
U.S. Commodity and Futures Trading Commission, CFTC Docket No. 12 – 25, June 27, 2012, p. 3.
63
FSA Final Notice, FSA Reference Number: 122702, June 27, 2012, p. 19.
64
Ibid.
65
FSA Final Notice, FSA Reference Number: 122702, June 27, 2012, p. 3.
66
House of Commons Treasury Committee, “Fixing LIBOR: some preliminary findings, Second Report of
Session 2012–13,” Volume I, p. 15.
67
FSA Final Notice, FSA Reference Number: 122702, June 27, 2012. Casewriter interpretation.
68
U.S. Department of Justice, Statement of facts, June 26, 2012, pp. 15–16, http://www.justice.gov/iso/opa/
resources/9312012710173426365941.pdf, accessed October 30, 2012.
69
Ibid., p. 16.
70
Ibid., p. 18.
71
Ibid., pp. 20–21.
72
Ibid., pp. 20–21.
73
FSA Final Notice, FSA Reference Number: 122702, June 27, 2012, p. 25.
74 House of Commons Treasury Committee, “Fixing LIBOR: some preliminary findings, Second Report of
Session 2012–13,” Volume I, p. 45.
75
“Bob Diamond’s notes of phone conversation with Paul Tucker emailed to then chief executive John
Varley, copying Jerry del Missier on October 30, 2008,” House of Commons Treasury Committee Fixing LIBOR:
some preliminary findings, Second Report of Session 2012–13, Volume I, pp. 44–45.
21
This document is authorized for use only by Ahmed Alhadaithi in 2017.
For the exclusive use of A. Alhadaithi, 2017.
313-075
Barclays and the LIBOR Scandal
76
House of Commons Treasury Committee, “Fixing LIBOR: some preliminary findings, Second Report of
Session 2012–13,” Volume I, p. 50.
77
U.S. Commodity and Futures Trading Commission, CFTC Docket No. 12 – 25, June 27, 2012, p. 48; and
“Libor scandal: Paul Tucker denies ‘leaning on’ Barclays,” BBC News, July 9, 2012, http://www.bbc.co.uk/
news/business-18773498, accessed October 3, 2012.
78
House of Commons Treasury Committee, “Fixing LIBOR: some preliminary findings, Second Report of
Session 2012–13,” Volume I, p. 53.
79
Ibid., p. 53.
80 Ibid.,
p. 43.
81 “Mark
Scott, Barclays’ Ex-Chief Spreads the Blame in Rate-Rigging Scandal,” New York Times DealBook, July
4, 2012, http://dealbook.nytimes.com/2012/07/04/diamond-defends-barclays-response-to-interest-rate-scandal/,
accessed December 18, 2012.
82
“Text: Bob Diamond letter to Andrew Tyrie,” Financial Times, June 28, 2012, http://www.ft.com/
cms/s/0/1734757a-c157-11e1-8179-00144feabdc0.html#axzz28H0SG0MF, accessed October 3, 2012.
83 House of Commons Treasury Committee, “Fixing LIBOR: some preliminary findings, Second Report of
Session 2012–13,” Volume I, p. 88.
84
“Board Changes,” Barclays press release, July 2, 2012, http://www.newsroom.barclays.com/Pressreleases/Board-changes-905.aspx, accessed October 4, 2012.
85 “Agius takes the bullet,” The Economist, July 1, 2012, http://www.economist.com/blogs/schumpeter/
2012/07/barclays-and-libor, accessed September 25, 2012.
86
House of Commons Treasury Committee, “Fixing LIBOR: some preliminary findings, Second Report of
Session 2012–13,” Volume I, p. 93.
87
“George Osborne gets his man: Mark Carney named as new Bank of England Governor,” The Independent,
November 27, 2012, http://www.independent.co.uk/news/uk/politics/george-osborne-gets-his-man-markcarney-named-as-new-bank-of-england-governor-8352494.html, accessed December 18, 2012.
88 The Wheatley Review of LIBOR: final report, September 20, 2012, pp. 8–9, http://www.efinancial
news.com/share/media/downloads/2012/09/4071167164.pdf, accessed December 18, 2012.
22
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Q&A 2)Professional accountants owe their primary loyalty to
1234-
the general public
their clients
the accounting profession
adherence to their code of conduct
===============
3) The difference between what the public thinks it is getting in audited financial statements and
what the public is actually getting is known as:
1- none of the answers listed
2- stewardship gap
3- expectations gap
4credibility gap
5- audit gap
4)Under what circumstance would it be acceptable for place her private earning a profit, ahead
of the a CPA to interest, i.ee. public interest.
1the client is involved in a fraud
2always
3never
4if the client is a senior government official
5)Skilling:
1joined Enron in 1990 to head up trading operations
2reported to no one at Enron
3joined Enron when it was initially formed in 1985
4never actually worked at Enron, he remained at McKinsey as an advior
6) According to the HBP case "The Fall of Enron', prior to the detection of the fraud at Enron and
the collapse of the firm
1Enron was created from the merger of Exxon and Mobil
2Enron grew primarily through the purchase of other firms
3Enron was successful but hovered near bankruptcy
4- Enron was a very successful and celebrated firm
7)According the HBP case "The Fall of Enron", Enron's accounting practices prior to the fraud can
best be characterized as:
1conservative
2innovative and aggressive
3-
clearly illegal
8)According to the HBP se "The Fall of Enron", Enron's fraudulent earnings manipulations were:
1well understood and crafted by Skilling
2Devised by Arthur Andersen
3Well understood and crafted by Sherron Watkins
4Approved by shareholders
9)According to the HBP e "The Fall of Enron". Enron referred to this type of transaction as
monetizing its assets
1Recording profits on energy trading
2Buying more assets with debt
3Lending money to third parties'
4seling assets to third parties and recording the cash income as profits
10)in the HBP Enron Case one of the primary objectives of the employee performance system
implemented by Skilling was to:
1terminate the employment of the bottom 20% performers
2fevard managers who terminated the most employees
3provide quality feedback to all employees
4reward the top 20% of performers
11)According to the HBP case "The Fall of Enron" Sherron Watkins was
1an employee of Enron
2an employee of the SEC
3an employee of Arthur Andersen
4an independent attorney for Enron
12)Ethics is:
1unrelated to philospohy
2a branch of philosophy that investigates normative judgments about what behavior is
right or wrong or what ought to be done
3a set of personal values and unrelated to business
4a branch of business that teaches about good corporate governance
13)Under this moral theory it is important the a decision be made for the right reason:
1Virtue Ethics
2Utilitarianism
3Justice and Fairness
4Deontology
14)This 20th century philosopher argued that social and economic inequalities are just if these
inequalities are to everyone’s benefit
1Immanuel Kant
2Jeremy Bentham
3Adam Smith
4John Rawls
5Thomas Hobbes
15-Lessons to be learned from the HP Spying case include:1-the importance of ethical guidance for the board of directors
2- the need for limits to the power of the chairman of the board
3- the need for the Chief Legal Counsel to be a board member
4- the need for law enforcement to be represented on the board.
16-The legal opinion given to HP on pretexting is a masterpiece of doubletalk and of little value.
Pretexting:
1 is an invasion of privacy
2 is not an of privacy
3-requires a cell phone to text
3 may not be illegal but is clearly unethical
17-Pretexting, as described in the HP Case, involved:
1234-
impersonating others
secret meetings
deleting texts from someone else
texting a board member using someone else s name
18- According to the HBP case "The Fall of Enron", Enron's fraudulent earnings manipulations were:
1234-
Well understood and crafted by Skilling
Devised by Arthur Andersen
Well understood and crafted by Sharron walkings
Approved by Shareholders.
18-Under what circumstance would it be acceptable for a cPA to place her private interest, e.
earning a profit, ahead of the public interest.
19-This moral theory focuses on the moral character of the decision maker rather than the
consequences of the action or the motivation of the decision maker
1- Deontology
2- Moral Imagination
3- Virtue Ethics
4- Justice and Fairness
5- Egoism
20- This moral theory is concerned with the rational motivation of the decision maker rather than the
consequences of the decision is
1-Deontology
123-
Moral Imagination
Virtue Ethics
Utilitarianism
21 - This moral theory argues that social and economic inequalities are just if these inequalities are
to everyone's benefit:
1- Virtue Ethics
2- Deontology
3- Utilitarianism
4- Kantianism Justice as Fairness
22- This approach presupposes that happiness, utility, pleasure, pain and anguish can be quantified
1- Justice and Fairness
2- consequentialism
3- Virtue Ethics
4- Deontology
23-Ethical dilemmas arise when:
None the listed answers
24- A stock options awarded to an employee:
1234-
creates a future obligation where employee must purchase share at the exercise price
are illegal
are never justifiable because shareholders have to sacrifice to much
are a form of incentive compensation that can be ethical if aligned with shareholder interests
25-In Brooks Case "The Ethics of Repricing and Backdating Employee stock options" the statement made
by the authors that "equals should be treated as equals and unequals treated unequally in proportion to
their inequalites', relates to which of the following?
1- Deontology
2- Theory of Justice
3- Moral Imagination
4- Consequentialism
26-Backdating options involves:
1-altering the expiration date of the option
2- altering the termination date of the option
3- altering the exercise date of the option
4-altering the grant date of the option
27-In the Brooks Case "The Ethics of Repricing and Backdating Employee stock options" the moral
theories examined were: 1. Deontology 2. Utilitarianism 3. Virtue Ethics 4. Egoism 5. Theory of Justice 6.
Moral Imagination
1-1.2.3and4
2- 2.3.5
3- 1.2.3.5
5- 3.5.4
28- According to the Brooks case "The Ethics of Repricing and Backdating Employee stock options"
the following were effectively curtailed as a result of Sarbanes-oxley Act disclosure
requirements:
1- backdating options
2- spring loading options
3- bullet dodging options
4- repricing options
29- According to the the Brooks case "The Ethics of Repricing and Backdating Employee stock
options" the one circumstance when backdating and repricing option can be ethically justified is:
1-None of the listed answers
2-Norms and values are in conflict
3- There are several theories of ethical decision making
4-There is only one alternative course of action available
5- Norms and values are not in conflict
30- Corporations are increasingly realizing that they are accountable: 1. Legally to Shareholders 2.
Legally to Stakeholders 3. Strategically to additional Stakeholders 4. Legally to Employees
1-1 and 2
2-1
3-1.2.and 4
4-1 and 3
5-1.3and 4
31- As presented in Brooks Chapter 5, ethical principles typically found in Corporate Codes of Ethics
include: 1) honesty 2) compassion 3) empathy 40 fairness 50 competitiveness 6) integrity 7)
accuracy:
1- 1.2.4.6
2- 1.2.3.5.6
3- All of the above
4- 1.2.3.4.6.7
32- The typical duties of a firm's Board of Directors includes: 1- Reviewing the firm's overall strategy
2-selecting and compensating the firm's senior executives 3- evaluating the firm's external
auditors 4-overseeing the firm's overall performance 5-overseeing the firm's financial
statements:
1- 1And 5
2- 1.2.3and 4
3- 1.2.3.4.and 5
4- 1.2.4.5
331234-
Experience has shown that, to be effective a corporate code of conduct needs to by reinforced
Ethics Officer and internal auditors
Principles rules and examples
All of the items listed in the other answers
Employee training Tone at the Top comprehensive ethical culture
34- The most important consideration in designing an effective corporate ethics program is that it
be:
1- compliance based
2-values based
3- enforcement based
4 looks good to outsiders
35- Pretexting, as described in the HP Case, involved:
1-impersonating others
2- secret meetings
3-deleting texts from someone else
4-texting a board member using someone else s name
36- The legal opinion given to HP on pretexting is a masterpiece of doubletalk and of little value.
Pretexting: 1 is an invasion of privacy 2-is not an of privacy 3- requires a cell phone to text 4
may not be illegal but is clearly unethical
1- 2.3.and4
2- 1.3.4
3- 1 and 4
4- 2 and 4
Q36)- According to the Brook's case Spying of HP Directors the settlement of the criminal and civil
charges brought against HP Patricia Dunn and other HP employees involved
1- paying $14.5 million in fines and promising to improve its corporate governance practices
2- an apology and a promise to strengthen corporate goveranance
3- an admission of wrong doing but no fine
4-an aquittal
Q 36) A Board of Director's primary duty is to
1- Safeguard the interests of a firm's stakeholders
2- Determine Management's Compensation
3- Safeguard the Interests of a Firm's Shareholders
4- Formulate a Company's Strategy
5- Protect a Firm's Assest
Q37) Effective Corporate governance is:
1- part of a corporate ethics program
2- distinctly separate and unrelated to a corporate ethics program
3- interdependent with a corporate ethics program
4- replaces a corporate ethics program
Q39) LIBOR, a benchmark interest rate used for pricing a variety of financial transactions, has been
estimated to be used as a pricing benchmark in ....... all over the world.
1- billions of dollars of transactions
2- trillions of dollars of transactions
3-
millions of dollars of transactions
Q40) The manipulated LIBOR rates submitted by Barclay's presented............ borrowing rates than
Barclay's was actually experiencing.
1- the same
2-
lower
3-
higher
Q41) Based upon the Barclay's LIBOR case, the 2012 $450 million settlement which Barclay's
reached with regulators in both the US and UK
1- required Barclay's to fire Bob Diamond
2-
did not include any statement by Barclay's regarding their wrongdoing.
3-
included Barclay's acknowledgement that it had manipulated LIBOR rates
4-
prevented Barclay's from submitting LIBOR data for 2 years
Q42) As stated in the Barclay's and the Libor Scandal Case, who said: "I don't feel personally
culpable. What I do feel is a strong sense of responsibility.
1- Minos Zombanakis, Banker at Manufacturers Hanover
2- Bob Diamond, CEO of Barclays
3- Lord Adair Turner, Chairman FSA
4- Sir Mervyn KIng. Governor Bank of England
Q43) As stated in the HBP Barclay's LIBOR case a primary motivation for Barclay's manipulation of
their LIBOR submission rates between 2005 and 2009 was:
1- To gain profits and/or limit losses on derivative trades
2- To create the impression the firm was less creditworthy than it was
3- To generate positive press
4- To create the need to borrow more money
Q44) Bob Diamond:
1- still works at Barclay's
2-
was fired
3- was arrested and charged with a felony
4- was allowed to resign
This is extra artical
http://www.chegg.com/homework-help/january-2006-chair-hewlett-packard-hp-patricia-dunn-hiredte-chapter-5.ec-problem-3sdq-solution-9781305445901-exc
Impact of Law on the Business Environment – On-line Class Discussion # 1
GRIM SHAW v. FORD MOTOR CO.
119 Cal. App. 3d 757
(Excerpted with citations omitted)
A 1972 Ford Pinto hatchback automobile unexpectedly stalled on a freeway,
erupting into flames when it was rear ended by a car proceeding in the same
direction. Mrs. Lilly Gray, the driver of the Pinto, suffered fatal burns and 13-yearold Richard Grimshaw, a passenger in the Pinto, suffered severe and permanently
disfiguring burns on his face and entire body. Grimshaw and the heirs of Mrs. Gray
(Grays) sued Ford Motor Company and others. Following a six-month jury trial,
verdicts were returned in favor of plaintiffs against Ford Motor Company.
Grimshaw was awarded $2,516,000 compensatory damages and $125 million
punitive damages; the Grays were awarded $559,680 in compensatory damages.
On Ford's motion for a new trial, Grimshaw was required to remit all but $3 1/2
million of the punitive award as a condition of denial of the motion.
Ford appeals from the judgment and from an order denying its motion for a
judgment notwithstanding the verdict as to punitive damages. Grimshaw appeals
from the order granting the conditional new trial and from the amended judgment
entered pursuant to the order. The Grays have cross-appealed from the judgment
and from an order denying leave to amend their complaint to seek punitive
damages.
Ford assails the judgment as a whole, assigning a multitude of errors and
irregularities, including misconduct of counsel, but the primary thrust of its appeal
is directed against the punitive damage award. Ford contends that the punitive
award was statutorily unauthorized and constitutionally invalid. In addition, it
maintains that the evidence was insufficient to support a finding of malice or
corporate responsibility for malice.
***
FACTS:
In November 1971, the Grays purchased a new 1972 Pinto hatchback manufactured
by Ford in October 1971. The Grays had trouble with the car from the outset.
During the first few months of ownership, they had to return the car to the dealer
for repairs a number of times. Their car problems included excessive gas and oil
consumption, down shifting of the automatic transmission, lack of power, and
occasional stalling. It was later learned that the stalling and excessive fuel
consumption were caused by a heavy carburetor float.
On May 28, 1972, Mrs. Gray, accompanied by 13-year-old Richard Grimshaw, set out
in the Pinto from Anaheim for Barstow to meet Mr. Gray. The Pinto was then 6
months old and had been driven approximately 3,000 miles. Mrs. Gray stopped in
1
Impact of Law on the Business Environment – On-line Class Discussion # 1
San Bernardino for gasoline, got back onto the freeway (Interstate 15) and
proceeded toward her destination at 60-65 miles per hour. As she approached the
Route 30 off-ramp where traffic was congested, she moved from the outer fast lane
to the middle lane of the freeway. Shortly after this lane change, the Pinto suddenly
stalled and coasted to a halt in the middle lane. It was later established that the
carburetor float had become so saturated with gasoline that it suddenly sank,
opening the float chamber and causing the engine to flood and stall. A car traveling
immediately behind the Pinto was able to swerve and pass it but the driver of a
1962 Ford Galaxie was unable to avoid colliding with the Pinto. The Galaxie had
been traveling from 50 to 55 miles per hour but before the impact had been braked
to a speed of from 28 to 37 miles per hour.
At the moment of impact, the Pinto caught fire and its interior was engulfed in
flames. According to plaintiffs' expert, the impact of the Galaxie had driven the
Pinto's gas tank forward and caused it to be punctured by the flange or one of the
bolts on the differential housing so that fuel sprayed from the punctured tank and
entered the passenger compartment through gaps resulting from the separation of
the rear wheel well sections from the floor pan. By the time the Pinto came to rest
after the collision, both occupants had sustained serious burns. When they emerged
from the vehicle, their clothing was almost completely burned off. Mrs. Gray died a
few days later of congestive heart failure as a result of the burns. Grimshaw
managed to survive but only through heroic medical measures. He has undergone
numerous and extensive surgeries and skin grafts and must undergo additional
surgeries over the next 10 years. He lost portions of several fingers on his left hand
and portions of his left ear, while his face required many skin grafts from various
portions of his body. Because Ford does not contest the amount of compensatory
damages awarded to Grimshaw and the Grays, no purpose would be served by
further description of the injuries suffered by Grimshaw or the damages sustained
by the Grays.
Design of the Pinto Fuel System:
In 1968, Ford began designing a new subcompact automobile[,] which ultimately
became the Pinto. Mr. Iacocca, then a Ford vice president, conceived the project and
was its moving force. Ford's objective was to build a car at or below 2,000 pounds
to sell for no more than $2,000.
•
Ordinarily marketing surveys and preliminary engineering studies precede
the styling of a new automobile line. Pinto, however, was a rush project, so
that styling preceded engineering and dictated engineering design to a
greater degree than usual. Among the engineering decisions dictated by
styling was the placement of the fuel tank. It was then the preferred practice
in Europe and Japan to locate the gas tank over the rear axle in subcompacts
because a small vehicle has less "crush space" between the rear axle and the
bumper than larger cars. The Pinto's styling, however, required the tank to
be placed behind the rear axle leaving only 9 or 10 inches of "crush space" –
2
Impact of Law on the Business Environment – On-line Class Discussion # 1
far less than in any other American automobile or Ford overseas subcompact.
In addition, the Pinto was designed so that its bumper was little more than a
chrome strip, less substantial than the bumper of any other American car
produced then or later. The Pinto's rear structure also lacked reinforcing
members known as "hat sections" (two longitudinal side members) and
horizontal cross-members running between them such as were found in cars
of larger unitized construction and in all automobiles produced by Ford's
overseas operations. The absence of the reinforcing members rendered the
Pinto less crush resistant than other vehicles. Finally, the differential
housing selected for the Pinto had an exposed flange and a line of exposed
bolt heads. These protrusions were sufficient to puncture a gas tank driven
forward against the differential upon rear impact.
Crash Tests:
During the development of the Pinto, prototypes were built and tested. Some were
"mechanical prototypes" which duplicated mechanical features of the design but not
its appearance while others, referred to as "engineering prototypes," were true
duplicates of the design car. These prototypes as well as two production Pintos
were crash tested by Ford to determine, among other things, the integrity of the fuel
system in rear-end accidents. Ford also conducted the tests to see if the Pinto as
designed would meet a proposed federal regulation requiring all automobiles
manufactured in 1972 to be able to withstand a 20-mile-per-hour fixed barrier
impact without significant fuel spillage and all automobiles manufactured after
January 1, 1973, to withstand a 30-mile-per-hour fixed barrier impact without
significant fuel spillage.
The crash tests revealed that the Pinto's fuel system as designed could not meet the
20-mile-per-hour proposed standard. Mechanical prototypes struck from the rear
with a moving barrier at 21 miles per hour caused the fuel tank to be driven forward
and to be punctured, causing fuel leakage in excess of the standard prescribed by
the proposed regulation. A production Pinto crash tested at 21 miles per hour into a
fixed barrier caused the fuel neck to be torn from the gas tank and the tank to be
punctured by a bolt head on the differential housing. In at least one test, spilled fuel
entered the driver's compartment through gaps resulting from the separation of the
seams joining the rear wheel wells to the floor pan. The seam separation was
occasioned by the lack of reinforcement in the rear structure and insufficient welds
of the wheel wells to the floor pan.
Tests conducted by Ford on other vehicles, including modified or reinforced
mechanical Pinto prototypes, proved safe at speeds at which the Pinto failed. Where
rubber bladders had been installed in the tank, crash tests into fixed barriers at 21
miles per hour withstood leakage from punctures in the gas tank. Vehicles with fuel
tanks installed above rather than behind the rear axle passed the fuel system
integrity test at 31-miles-per-hour fixed barrier. A Pinto with two longitudinal hat
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Impact of Law on the Business Environment – On-line Class Discussion # 1
sections added to firm up the rear structure passed a 20-mile-per-hour rear impact
fixed barrier test with no fuel leakage.
The Cost to Remedy Design Deficiencies:
When a prototype failed the fuel system integrity test, the standard of care for
engineers in the industry was to redesign and retest it. The vulnerability of the
production Pinto’s fuel tank at speeds of 20 and 30-miles-per-hour fixed barrier
tests could have been remedied by inexpensive “fixes,” but Ford produced and sold
the Pinto to the public without doing anything to remedy the defects. Design
changes that would have enhanced the integrity of the fuel tank system at relatively
little cost per car included the following: Longitudinal side members and cross
members at $2.40 and $1.80, respectively; a single shock absorbent “flak suit” to
protect the tank at $4; a tank within a tank and placement of the tank over the axle
at $5.08 to $5.79; a nylon bladder within the tank at $5.25 to $8; placement of the
tank over the axle surrounded with a protective barrier at a cost of $9.95 per car;
substitution of a rear axle with a smooth differential housing at a cost of $2.10;
imposition of a protective shield between the differential housing and the tank at
$2.35; improvement and reinforcement of the bumper at $2.60; addition of eight
inches of crush space a cost of $6.40. Equipping the car with a reinforced rear
structure, smooth axle, improved bumper and additional crush space at a total cost
of $15.30 would have made the fuel tank safe in a 34 to 38-mile-per-hour rear-end
collision by a vehicle the size of the Ford Galaxie. If, in addition to the foregoing, a
bladder or tank within a tank were used or if the tank were protected with a shield,
it would have been safe in a 40 to 45-mile-per-hour rear impact. If the tank had been
located over the rear axle, it would have been safe in a rear impact at 50 miles per
hour or more.
***
Management's Decision to Go Forward With Knowledge of Defects:
The idea for the Pinto, as has been noted, was conceived by Mr. Iacocca, then
executive vice president of Ford. The feasibility study was conducted under the
supervision of Mr. Robert Alexander, vice president of car engineering. Ford's
Product Planning Committee, whose members included Mr. Iacocca, Mr. Robert
Alexander, and Mr. Harold MacDonald, Ford's group vice president of car
engineering, approved the Pinto's concept and made the decision to go forward with
the project. During the course of the project, regular product review meetings were
held which were chaired by Mr. MacDonald and attended by Mr. Alexander. As the
project approached actual production, the engineers responsible for the
components of the project "signed off" to their immediate supervisors who in turn
"signed off" to their superiors and so on up the chain of command until the entire
project was approved for public release by Vice Presidents Alexander and
MacDonald and ultimately by Mr. Iacocca. The Pinto crash tests results had been
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Impact of Law on the Business Environment – On-line Class Discussion # 1
forwarded up the chain of command to the ultimate decision-makers and were
known to the Ford officials who decided to go forward with production.
Harley Copp, a former Ford engineer and executive in charge of the crash testing
program, testified that the highest level of Ford's management made the decision to
go forward with the production of the Pinto, knowing that the gas tank was
vulnerable to puncture and rupture at low rear impact speeds creating a significant
risk of death or injury from fire and knowing that "fixes" were feasible at nominal
cost. He testified that management's decision was based on the cost savings[,] which
would inure from omitting or delaying the "fixes."
Mr. Copp’s testimony concerning management’s awareness of the crash tests results
and the vulnerability of the Pinto fuel system was corroborated by other evidence.
At an April 1971 product review meeting chaired by Mr. MacDonald, those present
received and discussed a report (exhibit 125) prepared by Ford engineers
pertaining to the financial impact of a proposed federal standard on fuel system
integrity and the cost savings which would accrue from deferring even minimal
“fixes.”2 The report refers to crash tests of the integrity of the fuel system of Ford
vehicles and design changes needed to meet anticipated federal standards. Also in
evidence was a September 23, 1970, report (exhibit 124) by Ford’s “Chassis Design
Office” concerning a program “to establish a corporate [Ford] position and reply to
the government” on the proposed federal fuel system integrity stand ard which
included zero fuel spillage at 20 miles per hour fixed barrier crash by January 1,
1972, and 30 miles per hour by January 1, 1973. The report states in part: “The 20
and 30 mph rear fixed barrier crashes will probably require repackaging the fuel
tanks in a protected area such as above the rear axle. This is based on moving
barrier crash tests of a Chevelle and a Ford at 30 mph and other Ford products at 20
mph. Currently there are no plans for forward models to repackage the fuel tanks.
Tests must be conducted to prove that repackaged tanks will live without
significantly strengthening rear structure for added protection.” The report also
notes that the Pinto was the “[smallest ] car line with most difficulty in achieving
compliance.” It is reasonable to infer that the report was prepared for and known to
Ford officials in policy-making positions.
The fact that two of the crash tests were run at the request of the Ford chassis and
vehicle engineering department for the specific purpose of demonstrating the
advisability of moving the fuel tank over the axle as a possible “fix” further
corroborated Mr. Copp’s testimony that management knew the results of the crash
tests. Mr. Kennedy, who succeeded Mr. Copp as the engineer in charge of Ford’s
crash testing program, admitted that the test results had been forwarded up the
chain of command to his superiors.
Finally, Mr. Copp testified to conversations in late 1968 or early 1969 with the chief
assistant research engineer in charge of cost-weight evaluation of the Pinto, and to a
later conversation with the chief chassis engineer who was then in charge of crash
testing the early prototype. In these conversations, both men expressed concern
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Impact of Law on the Business Environment – On-line Class Discussion # 1
about the integrity of the Pinto’s fuel system and complained about management’s
unwillingness to deviate from the design if the change would cost money.
***
FORD'S APPEAL
***
On the issue of punitive damages, Ford contends that its motion for judgment
notwithstanding the verdict should have been granted because the punitive award
was statutorily unauthorized and constitutionally invalid and on the further ground
that the evidence was insufficient to support a finding of malice or corporate
responsibility for malice. Ford also seeks reversal of the punitive award for claimed
instructional errors on malice and proof of malice as well as on the numerous
grounds addressed to the judgment as a whole. Finally, Ford maintains that even if
punitive damages were appropriate in this case, the amount of the award was so
excessive as to require a new trial or further remittitur of the award.
In the ensuing analysis (ad nauseam) of Ford's wide-ranging assault on the
judgment, we have concluded that Ford has failed to demonstrate that any errors or
irregularities occurred during the trial[,] which resulted in a miscarriage of justice
requiring reversal.
(1) "Malice" Under Civil Code Section 3294:
The concept of punitive damages is rooted in the English common law and is a
settled principle of the common law of this country. The doctrine was a part of the
common law of this state long before the Civil Code was adopted. When our laws
were codified in 1872, the doctrine was incorporated in Civil Code section 3294,
which at the time of trial read: "In an action for the breach of an obligation not
arising from contract, where the defendant has been guilty of oppression, fraud, or
malice, express or implied, the plaintiff, in addition to the actual damages, may
recover damages for the sake of example.
***
Ford argues that "malice" as used in section 3294 and as interpreted by our
Supreme Court in Davis v. Hearst (1911) 160 Cal. 143 [116 P. 530], requires animus
malus or evil motive—an intention to injure the person harmed—and that the term
is therefore conceptually incompatible with an unintentional tort such as the
manufacture and marketing of a defectively designed product. This contention runs
counter to our decisional law. As this court recently noted, numerous California
cases after Davis v. Hearst, supra., have interpreted the term "malice" as used in
section 3294 to include, not only a malicious intention to injure the specific person
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harmed, but conduct evincing "a conscious disregard of the probability that the
actor's conduct will result in injury to others."
***
In Taylor v. Superior Court, our high court's most recent pronouncement on the
subject of punitive damages, the court observed that the availability of punitive
damages has not been limited to cases in which there is an actual intent to harm
plaintiff or others. . . . "In order to justify an award of punitive damages on this
basis, the plaintiff must establish that the defendant was aware of the probable
dangero...