Bob the value destroyer?
Much has been written about the damage to Barclays since the sensational imposition of the £290 million fine for Libor market-fixing. On Thursday, its stock fell by as much as 15% - currently trading at a 5.9 price to earnings ratio for the 2012 fiscal year - as markets price in the bank’s rising reputational risks.
Partly because the highest and lowest quotes are discounted when firming up the Libor rate, most reckon that any civil action will be an industry-wide phenomenon.
After a meeting with embattled Barclays CEO Bob Diamond on June 28, Morgan Stanley analysts analyzed litigation risk:
"It appears difficult for any one bank to influence LIBOR materially on its own as it is set by a panel of banks. According to the FSA report, until Feb 2011 “the US dollar LIBOR panel consisted of 16 banks and the rate calculation for each maturity excluded the highest four and lowest four submissions. An average of the remaining eight submissions was taken to produce the final benchmark rates”; this would indicate that some type of collusion between banks would need to take place to influence the rate. This would then become an issue for the industry rather than Barclays specifically.
... We see it as too early to tell the outcome of any litigation, though it may remain as an overhang for a multi-year period. As we’ve seen with some other companies(e.g. BP) litigation risk is likely to be a long overhang on a stock.
Morgan Stanley’s take on the accountability question:
"The emails published by the FSA appear to show wholly inappropriate behaviour by traders at Barclays and this is likely to cause reputational damage. Though, given he incidents happened several years ago, and the staff departures that have already taken place, this may mute radical change today. We also note many other banks are under investigation including Lloyds, RBS and HSBC in the UK, and once details of those investigations are published it may be easier to put the Barclays case into better perspective. Clearly, a key discussion with investors is on culture and whether regulators and investors will want to have more evidence of a change in culture and compliance procedures. Board reviews, regulatory reviews, personnel changes are all possible options."
In the meeting with Diamond, Morgan Stanley said he has no intention of resigning – despite calls for his head from the media and senior politicians – while the FSA approved his appointment 18 months ago in full knowledge of the investigation.
At its heart, the Libor saga is a political, risk-management and bank-regulation issue, and is conceptually distinct from the shifting sands in bank-funding markets since Lehman – such as the fall in interbank liabilities as a proportion of banks’ total assets and the rise of the secured bank funding market, as banks seek more stable funding sources and counterparties demand encumbrance.
What’s more, the European Central Bank (ECB) is acting as an inter-bank clearing house for even the northern European banks that benefit from market access.
However, there is a broader link of sorts: fear over Barclays’ weak capital position in 2008 is one speculated trigger for the manipulated Libor quotes, while Barclays’ officials have intimated the bank was under pressure from policy officials to manipulate quotes.
Simon Adamson, bank analyst at CreditSights, reckons regulators might look to quote Libor based on actual transactions, though the technical hurdles are enormous.
He concludes: “Regulators will try to safeguard the model rather than find an alternative to Libor.” Here’s a reminder of the fall of unsecured funding markets in proportion to banks' assets, courtesy of the ECB: