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Were The Barclays Traders Delusional?

Stephen Schauer | Getty Images

One of the oddest things about the Barclays Libor manipulation scandal is that no one has actually demonstrated that the British bank ever successfully manipulated Libor.

We know that during the financial crisis, Barclays executives believed other banks were submitting Libor numbers that intentionally understated the borrowing costs of banks. This, in turn, made the higher numbers Barclays was submitting look like an indication of financial distress. So Barclays decided to start low-balling its own submissions.

But this doesn't look like an attempt to manipulate Libor. (See the latest Libor rates and Treasury / Euro-Dollar spreads.)

It seems to have been an attempt to manipulate the perception of markets and regulators as to the health of Barclays. If you are rigging your numbers for reputational reasons, you don’t particularly care what the final Libor fixing is.

We also know that derivatives traders at Libor regularly asked the folks at Barclays to submit numbers intended to move Libor up or down based on their positions in trades linked to interest rates. The report from the Britain Financial Services Authority shows the submitters complying with the request.

But it doesn’t provide any indication that the attempted manipulation worked. In fact, it seems as if it didn’t work at all.

See these emails included in the FSA report:

“We have an unbelievably large set on Monday (the IMM). We need a really low 3m fix, it could potentially cost a fortune. Would really appreciate any help,” one trader asks in an email.

“I really need a very very low 3m fixing on Monday — preferably we get kicked out. We have about 80 yards [billion] fixing for the desk and each 0.1 [one basis point] lower in the fix is a huge help for us. So 4.90 or lower would be fantastic,” another trader explains.

The following Monday, March 13, the submitter informs a third trader that the submitted number will be 4.9, adding that “although 91 is what I should be posting.”

What it appears the traders were trying to do was to have Barclays submit a number low enough that it would be kicked out of the calculation for 3-month dollar Libor. When Libor is calculated, the four highest and lowest numbers are excluded, while the middling 8 are averaged.

It is possible to manipulate this system. The submissions are fairly predictable from day to day, so a bank can easily anticipate what the other submissions are likely to be. A bank that has been within the pack used for the trimmed average could submit a low ball number that would knock it out. In that case, one of the submissions from a bank that would have been excluded as too low would be included in the final calculation. This could have the effect of lowering Libor. (Simone Foxman at Business Insider has an excellent post on this.)

But this didn’t happen on March 13, 2006. On that day, Libor moved from Friday’s fix of 4.9 up to 4.91. According to data released by Thomson Reuters, fourteen of the banks submitted 4.91. Only Barclays and RBS submitted 4.9. There were no higher submissions.

In other words, it made no difference whatsoever that Barclays shaved a point off its submission.

The traders, however, seem to think they scored a spectacular victory.

"When I retire and write a book about this business your name will be written in golden letters," a trader writes to the submitter.

Was he just deluded?

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