[ by Howard Haykin ] Barclays agreed to settle with Washington and London regulators, and the Justice Department, to resolve accusations that the British bank attempted to manipulate a crucial global interest rate.  This action is the first such settlement in a sprawling global investigation that began in early February and targeted many of the world's biggest banks. Barclays will pay more than $450 million (£290 million) - the CFTC imposed a £200 million fine;  the FSA imposed a £93 fine.  The amounts set records for both regulators.  As part of the deal, the Justice Department agreed to not prosecute the bank.

"When a bank acts in its own self-interest by attempting to manipulate these rates for profit, or by submitting false reports that result from senior management orders to lower submissions to guard the bank's reputation, the integrity of benchmark interest rates is undermined." -- David Meister, CFTC Enforcement Director.

Barclays CEO Bob Diamond issued this statement: "The events which gave rise to today's resolutions relate to past actions which fell well short of the standards to which Barclays aspires in the conduct of its business.  When we identified those issues, we took prompt action to fix them and co-operated extensively and proactively with the authorities." [C-I Note: See related post on Wednesday in WHO: "Barclays Executives to Waive Bonuses..."]  Scope of the Investigation. The probe centers on the way Barclays and other big banks set a key benchmark for borrowing - i.e., the London Interbank Offered Rate, or Libor.  Regulators questioned whether the banks attempted to improperly set the rate at a level that was favorable to their own institutions.  Other banks targeted in the investigation include:  HSBC, Citigroup, and JPMorgan Chase.

• In the aftermath of the financial crisis, global regulators have been looking into whether many of the world's largest banks attempted to manipulate Libor, a measure of how much banks charge each other for loans.

• At least 9 country regulators participated in these investigation, including the Justice Department, the Britain's Financial Services Authority, and Japan's Financial Supervisory Agency.

• Similar benchmarks are also being investigated. Authorities also are looking into the activity surrounding similar benchmarks known as Tibor (Tokyo interbank offered rate) and Euribor (euro interbank offered rate).

Barclays notes that, back in August, various government probes had been focused on accusations that Barclays and other firms suppressed interbank rates between 2006 and 2009.  Barclays says it has cooperated with the investigations. Libor, Its Function and Importance. Libor is an important barometer of market interest rates and of the health of the financial system, and it is used to price more than $350 trillion worth of financial products, including complex derivatives and home loans. Libor and the other interbank rates provide benchmarks for global short-term borrowing, and are published daily based on surveys from banks about the rates at which they could borrow money in the financial markets.  Currently, more than a dozen financial firms, including JPMorgan, Bank of America, and HSBC, provide information to set the daily American dollar Libor rate. Regulators are investigating whether ... banks shared information between their treasury departments, which help to set Libor, and their trading units, which buy and sell financial products on a daily basis.  Financial institutions are expected to maintain so-called Chinese walls between these 2 divisions to avoid confidential information being used to turn a profit as part of banks' daily trading operations. Analysts say the Libor system, established in 1986 and is overseen by Thomson Reuters on behalf of the British Bankers' Association, does not provide sufficient transparency about how banks set their daily interest rates for borrowing in the financial markets. When many banks were unable to borrow in the financial markets during the financial crisis, authorities raised concerns about the figures that firms were using to set Libor. The collapse of Lehman Brothers served to increase interest rates that banks had to pay for short-term borrowing.  It is at this time that regulators began to worry that financial firms might have manipulated Libor by submittign low interest rate figures that underpin Libor.  Lower rates would give the appearance that the banks were in stronger financial positions than they actually were.  Yet, it was the limited oversight of the banks that probably provided them with the actual incentive to manipulate the rates.  Since then, regulators from several countries began their investigations:

• U.S. regulators have issued subpoenas to several banks - including BofA, UBS, and Citi - about how Libor is set.
• The Competition Bureau of Canada is investigating activities of JPMorgan, Deutsche Bank and several other major banks about their activities around Libor.
• Japanese, Swiss, and British authorities also are conducting their own inquiries into how the interbank rates have been set over the last five years.

Charles Schwab Sues Major Banks. It was in 2011 that Schwab, the brokerage firm and investment manager, sued 11 major banks, including Bank of America, JPMorgan Chase, and Citigroup, claiming they conspired to manipulate Libor. The British Bankers' Association, which sponsors the interbank rate, defends its rate-setting process, though the trade body established a committee earlier this year to revise how Libor was set. The changes are expected to focus on establishing guidelines, including which bank employees can be told about the daily interbank rates and which specific financial instruments can be used to set Libor. For further details, go to:  [Dealbook, 6/27/12] and [Barclays Statement of Facts - U.S. DOJ].