The 24% taxpayer-owned bank not only became the seventh financial firm to be fined by the Financial Conduct Authority for manipulating Libor, but the first to be censured for deliberately reducing the fees it paid to the Bank of England for emergency funding during the 2008 banking crisis.
Along with the US department of justice – which handed Lloyds a two-year deferred prosecution agreement – and the Commodities Futures Trading Commission, also in the US, the FCA published a series of emails and electronic chats showing jovial exchanges between traders. Referring to each other as mate, dude and lad, the trader emails are signed off with phrases such as "grovel grovel" and spelling errors such as "happy to ablige … rubbery jubbery".
Among those suspended by Lloyds on Monday were three of the four unnamed individuals cited by the FCA who may have been involved in depriving the Bank of England of emergency funding fees of almost £8m.
A total of 22 people are understood to be bound up in the latest regulatory crackdown on benchmark manipulation; six had already been suspended before Monday and the rest have already left the bank. Their identities are not revealed in a series of damning emails and electronic chats released by regulators as they handed out fines. Instead the individuals are referred to as "manager a" or "trader b".
The latest regulatory actions cover three main issues which date back to the financial crisis when Lloyds TSB – as it was then known – rescued HBOS three days after Lehman Brothers collapsed in September 2008. HBOS owned Halifax and Royal Bank of Scotland. The three issues are:
Libor 'lowballing'There were deliberate attempts by traders at Bank of Scotland – part of HBOS – to cut their submissions to the Libor panel to avoid giving the impression the bank was facing financial difficulty. This was dubbed "lowballing" by regulators.
During the period, Libor was set by a group of banks. They made submissions to a panel, estimating how much they thought their rivals would charge to lend them money in certain currencies and across a range of timescales from overnight to 12 months.
Any bank submitting a higher rate than rivals could be regarded as being in financial distress. In August 2008, a Bank of Scotland manager circulated a memo in which the warning was given that paying too a high a rate "may give the impression of HBOS being a desperate borrower and so lead to a general withdrawal of wholesale funds".
A month later, after Lehman Brothers had collapsed, the deal to rescue HBOS was announced. A Bank of Scotland trader submitting Libor estimates told a rival: "Youll like this ive been pressured by senior management to bring my rates down into line with everyone else." The submitter then cut rates by as much as half a percentage point.
Traders were found to have colluded with rivals at Dutch rival Rabobank over the yen Libor rate. In one exchange, a Rabobank trader submitting yen estimates was reported to have told a rival at Lloyds: "morning skip … my little [racial epithet redacted] friend in Tokyo wants a high 1m (one month) fix from me today."
In another, a Lloyds trader remarked when asked about reducing a Libor rate: "Every little helps … It's like Tescos." He got the reply: "Absolutely every little helps."
In another instance, one trader was found to have been focusing on "forcing Libor" from September 2006 in order to drive up the value of trading positions.
Abuse of liquidity scheme
This involved cutting the fees paid to the Bank of England for the special liquidity scheme (SLS), which pumped money into the financial markets when the crisis was at its deepest. During the period, Lloyds TSB and HBOS paid £1.3bn in fees to the Bank. This was just under half of all fees owed by the industry under the scheme, which was regarded as crucial in keeping the banks afloat.
Four individuals took steps that saved just under £8m by changing the so-called repo rate, which was crucial in setting the fees their banks were charged. Between January 2009 and September 2009 there were attempts by Bank of Scotland and Lloyds traders to inflate their repo rates, which had the impact of cutting the fees of their joint owner, Lloyds Banking Group.
A dialogue between a Lloyds trader and a Bank of Scotland manager shows a discussion about the fees: "I think we worked out ours is going to cost another 6.8 million quid," the Lloyds trader said, to which the response was: "Just keeps on going up and up and up doesn't it?"
The regulator shows a manager from Bank of Scotland and a trader at Lloyds acknowledging their influence over the repo rate used to price the SLS. "While we've got two votes we should use this to our advantage, you know what I mean?" the Bank of Scotland manager told his colleague in April 2009, four months after Lloyds completed its takeover of HBOS.
There were 12 banks on the panel which set the repo rate, and Lloyds had two places as a result of the HBOS deal.
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