Bank rate rigging scandal widens

LONDON Fri Jun 29, 2012 1:20pm BST

Bob Diamond, CEO and chairman of Barclays, speaks during a panel discussion at the Institute of International Finance (IIF) annual meeting in Washington September 25, 2011. REUTERS/Yuri Gripas

Bob Diamond, CEO and chairman of Barclays, speaks during a panel discussion at the Institute of International Finance (IIF) annual meeting in Washington September 25, 2011.

Credit: Reuters/Yuri Gripas

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LONDON (Reuters) - A scandal over the rigging of key interest rates could create a legal morass that may hamper the global banking industry for years, analysts said, as the head of Barclays fought to hold onto his job.

With the Times newspaper naming RBS (RBS.L) as the next bank facing a fine for its alleged involvement in manipulating the key lending rate between banks, the head of the Bank of England said there needed to be "real change" in the industry's culture.

"That will require two things. One is leadership of an unusually high order and changes to the structure of the industry," Mervyn King told a news conference, adding he hoped that parliament would legislate as soon as possible.

U.S. and British authorities fined Barclays (BARC.L) $453 million (290 million pounds) on Wednesday for manipulating the London interbank offered rate (Libor), which underpins some $360 trillion of loans and financial contracts around the world - and analysts forecast more banks would soon be named for collusion.

"Reading the statements by the authorities we expect to get settlements by others in the course of time which could be more punitive," analysts at Credit Suisse said.

Others predicted Barclays and other banks could face billions in costs from litigation, especially in the United States, in much the same way that oil major BP (BP.L) ran into drawn-out legal rows over its oil spill.

"Given the long-tailed nature of investigations we expect this to be a long-term overhang," said Morgan Stanley analyst Chris Manners.

The Times said RBS faced a likely fine of 150 million pounds for participating in market manipulation offences similar to those engaged in by Barclays.

But the heaviest pressure remained on Barclays chief Bob Diamond, who was running the investment banking arm Barclays Capital when the rigging occurred in 2005-2009, despite his vow not to quit.

"Politicians have already been baying for blood and calling for the head of Bob Diamond, especially as he was in charge at BarCap at the time," said Stephen Peak, manager of the Henderson UK Alpha and European Absolute Return funds and a shareholder in the bank.

"We feel that the Barclays board will instinctively wish to resist this, as Diamond is clearly the architect and leading light of Barclays, but feel that the pressure may be too great."

Prime Minister David Cameron said Diamond and other bosses had some "big questions to answer". Britain also called in the fraud squad to investigate possible crimes.

Diamond told Morgan Stanley analysts on Thursday he did not intend to stand down. He won few political friends last year when he told a parliamentary committee it was time for bankers to stop apologising.

Barclays Chairman Marcus Agius is also coming under pressure to step down.

SPREADING SCANDAL

Authorities investigating the Libor scandal are looking at banks in Europe, North America and Japan.

In response to the Times report RBS said it continued to co-operate with regulators on the ongoing investigation, adding any resolution of its case was months away.

"The process is not as far advanced as the (Times) article suggests and there can be no certainty as to the timing or amount of any fine or settlement at this point," the bank said in a statement.

The rate-fixing affair, which disclosed e-mails in which bankers appeared to promise bottles of champagne to each other for help in setting the rates, has fuelled anger from taxpayers struggling with austerity measures who are now closely watching the banks they bailed out during the financial crisis.

Adding to their ire, the Financial Services Authority said on Friday it had found "serious failings" in the way specialist insurance had been sold by Barclays, RBS, HSBC (HSBA.L) and Lloyds (LLOY.L), concluding they mis-sold products to small businesses.

Compensation could run into the hundreds of millions of pounds, lawyers have said, although Lloyds said the cost for it would not be material.

The FSA said from 2001 to date, banks sold around 28,000 interest rate protection products to customers, although it did not did not say how much it would cost the banks.

A string of mis-selling cases has damaged the reputation of the financial services industry for over two decades. Banks are already committed to paying upwards of 9 billion pounds to customers in compensation for mis-selling loan insurance.

Shares in Barclays eased another 0.5 percent on Friday after shedding 15 percent on Thursday. Overall the European banks index .SX7P recovered 2.2 percent after Euro zone leaders agreed emergency action to cut Spain's and Italy's borrowing costs.

(Additional reporting by Sinead Cruise and Matt Scuffham; writing by Sophie Walker; editing by Philippa Fletcher)

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