Barclays' Diamond faces grilling in parliament

Bob Diamond squares up to critical British lawmakers on Wednesday, a day after quitting as Barclays' chief executive over the Libor interest rate scandal, potentially dragging the Bank of England, government and rival banks deeper into the affair.

Diamond's testimony to a parliamentary inquiry could prove politically explosive; on Tuesday, Barclays published a 2008 internal memo from him which fellow managers understood to mean that the Bank of England and government might approve if they manipulated the Libor rate at the height of the banking crisis.

The American banker is scheduled to appear before the cross-party Treasury Select Committee at 2 p.m. (1300 GMT).

Though his compatriots across the Atlantic will be celebrating a holiday marking their independence from Britain, Diamond said he "looked forward to fulfilling" his appointment with the parliament in London, despite having already resigned.

Barclays' defense tactic of claiming official sanction for manipulating a rate at a time of market crisis drew a skeptical response on Tuesday from the man who was British finance minister at the time. Alistair Darling said he could not imagine the central bank asking Barclays to take such action and said his department would never "suggest wrongdoing like this".

Britain's third-biggest bank was fined nearly half a billion dollars for its part in manipulating a key interest rate, the London Interbank Offered Rate, or Libor, which underpins financial transactions worth an estimated $360 trillion.

Diamond is the third senior Barclays official to quit over the affair this week, following fines the bank agreed to pay last week of $453 million to British and U.S. authorities.

Barclays said in its submission that it was "ironic" that there had been such an intense focus on it alone, because the company had been the first to settle with authorities over Libor in the midst of a global investigation of the banking industry.

Banking Scandals

The Libor scandal comes at a time of increasing anger in Britain against the banks, already widely excoriated for their role in the financial crisis of the past few years.

Politicians and newspapers have seized on the Libor scandal - which exposed macho e-mails between bankers congratulating each other with offers of champagne for helping to fiddle figures - as an example of a culture of wrongdoing in an industry that only stayed afloat with huge taxpayer bailouts.

Libor is a market benchmark published by the British Bankers Association (BBA) based on a survey of what London banks tell its compilers they have to pay to borrow from their peers, in various currencies and for different periods. It is used to price financial contracts around the world, ranging from complex interbank transactions to consumer mortgages and student loans.

In the four years to 2009, when the authorities believe banks were lying about their borrowing costs to influence the Libor benchmark, some customers may have benefited, and others lost out. Some bankers may have manipulated the rate to profit in certain transactions. Much of the focus, however, has been on late 2008, when the Lehman Brothers collapse in the United States pushed global financial markets into crisis.

In that period, high borrowing costs for banks reflected a loss of confidence that managers - and governments - were trying to shore up, creating a temptation for bankers to report lower interest rates to the BBA than they were actually having to pay.

Official Encouragement?

The 2008 memo suggests that Barclays was given implicit encouragement by the deputy governor of the Bank of England, Paul Tucker, to massage its contributions to setting Libor lower during the peak of the financial crisis to present a better picture of Barclays' financial health.

According to the memo, Tucker told Diamond, then head of Barclays' investment bank, he had received calls about the Libor rate and banks' submission for it from senior government officials. "It did not always need to be the case that we appeared as high as we have recently," Diamond said he had been told in a note to then chief executive of Barclays.

The Bank of England declined to comment.

Former Chancellor of the Exchequer Darling was skeptical of the Barclays defense: "What Bob Diamond or Barclays appear to be saying is that the Bank (of England) told them to do this," he told Channel Four television.

"I would find it absolutely astonishing that the Bank would ever make such a suggestion and equally I can think of no circumstances that anyone, certainly in the department which I was responsible for - the Treasury - would ever suggest wrongdoing like this," said Darling, whose centre-left Labour party is now in opposition.

Barclays agreement to pay fines last week increased pressure on other banks to cooperate in a probe which could cost the industry billions of dollars.

The Libor figures submitted by banks are compiled by Thomson Reuters, parent company of Reuters, on behalf of the BBA.

[Source: By Matt Scuffham, Reuters, London, 03Jul12]

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