Barclays Bank

Guys: alphabetize your

sources if you cited them

Mark Mandel

Manas Rajaram

Maria Sharpe

Marissa Stavropoulos

Lauren Weiland

MGMT 301H

First Draft: Due 4/12/13

Introduction and Problem

Barclays is the third largest worldwide banking institution trailing closely behind HSBC and

JPMorgan. This multinational bank extends its reach to over 50 countries in Europe, Asia, Africa and the

Americas. It is involved in personal banking, credit cards, corporate and investment banking and wealth

and investment management. The company itself employs over 140,000 people. Barclays has grown

immensely from the original business ventures of John Freame and Thomas Gould back in 1690. Barclays

has been successfully running their business for over 300 years (“About Us.”).

Today the company embraces a goal to “help people achieve their ambitions -­ in the right way”

(“About Us.”). Barclays is part of the London Stock Exchange and complies with the UK Corporate

Governance Code. They are also listed on the New York Stock Exchange and therefore adhere to the

NYSE’s corporate governance rules. The inner framework of Barclays is composed of five small

committees which oversee each area of business in which the bank engages (see chart 1). These

committees answer to the thirteen member executive committee headed by the Chief Executive Officer,

Antony Jenkins. The executive committee answers to the Board, another eight member council who are

the top in chain of command. These eight individuals indirectly oversee all areas of business. Antony

Jenkins, CEO of Barclays is a member of both committees and facilitates understanding between the two

levels of command.

Recently, the bank has revised its employee handbook. Their new operating philosophy is based

off of five key values: respect, integrity, service, excellence and stewardship. They strive to create an

environment that puts the collective group ahead of individual interests. They claim to have a collaborative,

proactive approach which incorporates diversity into achieving the best results. According to the bank’s

mission statement, employees are passionate about leaving things better than how they were found. The

clients and customers are the center focus of this bank (“About Us.”). On the surface, everything seems

to be in order, the bank appears to have a strong structure in place to keep everything in check. However,

Barclays has just experienced quite the scandal after being found guilty of manipulating the dollar on the

London Interbank Offered Rate also known as LIBOR.

LIBOR is a benchmark interest rate based on how much money banks in the London interbank

market are willing to lend to each other. This monetary value is not actually being borrowed or lended to

the market, it is a hypothetical number. It is simply an amount which banks would be “willing” to lend to

each other based on how their assets and finances look each day. The reports gathered through LIBOR

are based largely on the honor system, there are few regulations in place to ensure each bank files

correctly. The LIBOR report is calculated daily by the Thomson Reuters data collection service. Thomas

Reuters collects the data from each bank every morning, discards the highest and lowest 25% of

submissions and averages the remaining rates to determine the LIBOR. This same process is repeated for

fifteen different maturities and ten different currencies (Investopedia).

To give an impression of exactly how large of an effect LIBOR rigging can have on lending and

investing, it should be noted that there is enough money tied to it to completely pay for US government

spending for 96 years, namely over and above $350 trillion (Waggoner 1), meaning Barclays profited

immensely and there was a clear motive for foul play. Because LIBOR is a benchmark that hundreds of

traders bet on derivatives with, changing rates “could be exceptionally lucrative” for the traders and

companies that are colluding. Despite the fact that LIBOR is calculated in London, the United States’

adjustable rate, subprime loans and consumer debt mortgages are calculated using the LIBOR (Matthews

1). Though Barclays admitted to fiddling with the rate since 2005, the recent financial crisis gave banks a

new reason to want to inflate or deflate LIBOR. Basically, the higher a company’s LIBOR estimate rates

are, the more expensive it is for the bank to borrow money. When money cannot be borrowed cheaply,

investors and stockholders begin to worry about a company’s ability to function profitably. Therefore, in

this scenario, it was profitable during the financial crisis for Barclays to decrease their LIBOR estimates

so that they could be seen as more worthy of investment.

There is an overwhelming amount of evidence against many employees at Barclays (and even

other banks) that suggest there was a massive amount of collusion involved to rig the LIBOR rates.

According to The Fiscal Times, the regulator’s report says Barclays submitted false rates on numerous

occasions between 2005 and 2008;; additionally, they encouraged other banks to submit higher or lower

rates—there is proof of insider trading due to many recorded text messages from outside traders to

employees, a potent example being one that said “Dude. I owe you big time! Come over one day after

work and I’m opening a bottle of Bollinger,” a few days after an especially low submission rate

(Rosenberg 1). This affected everyone who took out loans on those days that LIBOR was falsely

rigged—not just the financial elite—because the average consumer’s interest rates for mortgages and

other loans would definitely fluctuate based on the LIBOR. Many news outlets have since stressed that

the main loser in this situation was the consumer, and the winner, temporarily, was Barclays and other

colluding banks. There is no doubt in the minds of law enforcement throughout Europe and the United

States that this rigging of rates occurred and was a premeditated attempt to profit through shortchanging

those who rely on interest rates, including everyday people and even the city of Baltimore (O’Toole 1).

Analysis

Many of the factors that influenced the Barclays scandal are relevant to topics that have been

covered in class at some point this semester. The central one is ethics—Barclays made the conscious

decision to do what was profitable instead of what was morally correct. There were not any blurred

ethical lines, as rigging the LIBOR in any capacity is clearly ethically wrong. This leads into the concept of

leadership. Though it is unclear who specifically made the decision to commit fraud, the entire executive

leadership team was naturally blamed for allowing it to occur. The breaking of the scandal caused

chairman Marcus Agius, chief executive Bob Diamond, and chief operating officer Jerry del Missier to

resign immediately. Had they not chosen to do so, they likely would have been fired for enabling such an

enormous fraud to take place.

Another relevant topic to the Barclays scandal is power and influence. The people involved in the

scandal were very high up in the company and therefore could make important decisions without much

consultation. Oftentimes, people in positions of power allow the great power that they have to negatively

influence their morals. Just because a person can do something doesn’t mean that they should, but many

corporate executives are willing to do whatever it takes to make money, regardless of good judgment and

morality. The organizational culture at Barclays seems to have been extremely profit-­driven, as it is as

most banks, and this likely impacted the mindsets of many individual employees at all levels. This culture

starts with the executives, who in this case were clearly driven entirely by money and lacked solid moral

decision-­making skills.

One thing that Barclays could have done to prevent this would be to have implemented an

organizational structure with more checks and balances, similar to elements of the matrix management

structures discussed in class. If more people had a say in the big decisions that the company was making,

there would have been a better chance that someone would have spoke up against the LIBOR violations.

Potential Solutions

Antony Jenkins, the new CEO of Barclays, is on track for a five-­year journey to turn Barclays

into the "go to" bank. It will not be the destination for the tax avoidance products of the past, but for good

service from staff that are less motivated to make profits and are encouraged to treat customers with

respect. He has pledged to change the culture of the bank, linking bonuses to new values of respect,

integrity, service, excellence and stewardship. In meetings with shareholders, he is said to have discussed

the idea of turning the bank into a company focused on service for customers and becoming more

efficient. After years of being a bank whose ethos has revolved around profit maximization it will be no

easy task to transform the industry to one where success is measured through the amorphous metrics of

"respect," "integrity" and “service". Antony Jenkins is seeking to overhaul the banking industry, known for

its scandals and shame, and “transform” Barclays public image into a bank known for its highly principled

behavior as well as its quest for high profits.

Last month the London-­based banking giant disclosed its first full-­year net loss in two decades and

unveiled plans to cut another 3,700 jobs in 2013 as part of a turnaround plan and shift in focus. Barclays

said it aims to slash its total cost base by 1.7 billion pounds to 16.8 billion pounds in 2015. “Barclays is

changing. We intend to change what Barclays does and how we do it,” Barclays CEO Antony Jenkins

said in a statement in February. Jenkins won't just be confronting the business-­as-­usual culture within his

own firm but that which still prevails across the banking landscape, from Wall Street to The City and on to

Mumbai and Shanghai. It already is clear to investors in banking stocks that it likely is only going to

become more difficult to capture the same kind of profits and returns on equity that they did in the 1990s

and especially in the years leading up to the financial crisis. That means there will be less willingness to

tolerate lofty bonus paydays to employees — which may have ramifications in terms of the willingness of

those employees to go along with Jenkins' vision of a more ethical and possibly not quite as profitable

financial institution.

One of the ways he intends to change the culture is to alter the way bonuses are handed out.

From the middle of next year staff will be measured on the basis of a "balanced score card" against his

five values of respect, integrity, service, excellence and stewardship. This need not mean smaller pay

packets – even by City standards the bank is known for generous pay deals – but ones that are not based

entirely on generating profits. Antony Jenkins also reportedly recently told investors that he is searching

for a way to eventually carve out 40,000 jobs, or about 28%, from the British banking giant. Jenkins said

that cost reduction is his absolute priority, adding that a bank’s “only competitive advantage is going to be

lower costs.”.

If Jenkins somehow succeeds in getting his teams of investment bankers to think about their world

in different terms, a tougher task remains: How will they generate the kind of profits that Jenkins has

promised shareholders? Jenkins may require his team of investment bankers to focus on integrity,

excellence, ethics and stewardship — but if doing so doesn't help Barclays generate a target ROE of 11.5

percent within a few years' time, it's hard to believe that a few blind eyes won't be turned to whatever the

next popular form of highly lucrative products or services may be, regardless of the risks that may come in

their wake. Jenkins, who admits he played a part in mis-­selling payment protection insurance, defended the

"socially useful" role of investment banks in helping companies raise money to grow or protect their

exposure to currency movements. "Investment banking in itself is hugely valuable to society when it does it

the right way," Jenkins said. When it gets it wrong it proves costly. Reporters asked him how his success

should be measured in five years' time. He cited better customer service, high levels of colleague

engagement and shareholders happy with the returns they were receiving.

Conclusion

The emergence of Barclay’s Bank fixing LIBOR rates came as a surprise to most because for

decades, regulators and people in the financial industry assumed that banks’ desire to protect their

reputations would keep them honest, (Surowiecki). However, the truth is that investors’ genuine beliefs

that the banks would remain truthful under self-­regulation was quite naïve. In addition to the LIBOR

scandal, which did in turn affect the United States interest rates and exchange rates between international

currencies, corporate fraud is an unfortunate but prevalent problem of the 21st century. With frauds

ranging in measure from something as severe as Bernie Madoff valuing his companies wealth at 50 Billion

dollars instead of its actual worth of 15 Billion dollars to something more trivial like the CEO of

RadioShack David Edmondson lying about attaining a degree from Pacific Coast Baptist College, these

scandals still have potential to wreak havoc on the market share of these companies and create a sense of

distrust within the entire financial system.

With regard to the more serious cases of corporate fraud, most companies blame their collapses

and mishaps upon a couple of dishonest employees. It should become the norm that there exist ample

internal defense mechanisms that combat and prevent scams regardless as to whether or not certain

corrupt individuals in a self-­regulating firm attempt to cheat the system. Sometimes something as simple

as email regulation and filtering could potentially even inhibit fraud or at least stop it before it grows large

enough to disrupt entire economies because Barclay’s traders were emailing colleagues thanking them for

lying. These corrupt individuals even went as far as notifying their supervisors about their plans and

ultimately developed this environment where ‘cheating became contagious’ due to the tolerance and even

rewarding of unethical behavior, (Surowiecki). In some situations, spying on employees emails may be

viewed as a sign of disrespect and a firm may scare off legitimate and hard-­working employees that just

feel they don’t deserved to be watched by “Big Brother.” Consequently, a firm may then consider

independent review or auditing from an outside source or just enact stricter regulations as to who can view

and handle important documents and company finances. These methods are less obstructive to the

day-­to-­day work done by individuals and since people will know that everyone is being held to the same

standards, there is a smaller probability of an employee feeling singled out.

As business practices evolve and actions are taken to thwart immoral conduct, it will never be

feasible to impede corporate fraud entirely because the shortcuts evolve as quickly as the new barriers are

built. Nevertheless, these criminals know what they are getting themselves into if they are caught yet they

believe the reward outweighs the risks they are taking. The unfortunate truth about this is that the

negatives associated with their actions extend far beyond their typical weak five to ten year sentences in a

hotel-­like prison. When an executive of a famous and powerful firm is caught in a scandal, it creates a

domino effect that trickles down and ends up negatively affecting all investors. When the scandal erupts,

it exhibits the dishonesty that exists in the industry;; investors withdraw their investments out of fear and

people stop taking out loans. Since banks cannot rely on the previously consistent returns and interest

gains from loans, they are forced to increase interest rates which further inhibits the average person from

taking out loans and thus leads to a stagnant economy where GDP decreases and purchasing power

decreases both in the country and worldwide. The fact that corporate fraud is almost expected and

accepted as a necessary evil in today’s society is the main ingredient in the poison that is killing the

financial and banking industry. New technology and discoveries pave the way for an ever increasing

economy yet scandals such as Barclay’s LIBOR rigging make it so that every three steps forward an

economy makes is immediately followed by two steps back (sometimes even more depending on the

severity of the scandal). The only way to legitimately solve this issue is to shift the focus of business

culture from being purely profit-­oriented to balancing ethics, responsibility, and profits because it is evident

from the most recent recession that one-­time profit gains (such as those that came from the housing

bubble and investment banks profiting off of defaulting loans) eventually crash and end up causing more

harm than good.

Works Cited

1. "About Us." Barclays.com -­. N.p., n.d. Web. 21 Apr. 2013.

<http://group.barclays.com/about-­barclays/about-­us>.

2. "London Interbank Offered Rate -­ LIBOR." London Interbank Offered Rate (LIBOR)

Definition. Investopedia, n.d. Web. 21 Apr. 2013.

<http://www.investopedia.com/terms/l/libor.asp>.

3. Matthews, Dylan. "Explainer: Why the LIBOR Scandal Is a Bigger Deal Than JP Morgan."The

Washington Post. N.p., 5 July 2012. Web. 20 Apr. 2013.

<http://www.washingtonpost.com/blogs/wonkblog/wp/2012/07/05/explainer-­why-­the-­libor-­sca

ndal-­is-­a-­bigger-­deal-­than-­jpmorgan/>.

4. O'Toole, James. "Explaining the Libor Interest Rate Mess." CNNMoney. Cable News Network, 03

July 2012. Web. 20 Apr. 2013.

<http://money.cnn.com/2012/07/03/investing/libor-­interest-­rate-­faq/index.htm>.

5. Rosenberg, Yuval. "Libor-­gate Explained: Why Barclays' Scandal Matters." Libor-­gateExplained: Why Barclays' Scandal Matters. The Fiscal Times, 06 July 2012. Web. 20 Apr.2013.

6. "Timeline: How the LIBOR Scandal Unfolded." The Telegraph. Reuters, 19 Dec. 2012. Web.20 Apr. 2013.<http://www.telegraph.co.uk/finance/libor-­scandal/9754981/Timeline-­How-­the-­Libor-­scandal-­unfolded.html>.

7. Surowiecki, James. "Bankers Gone Wild." The New Yorker. N.p., 30 July 2012. Web. 20 Apr.

2013. <http://www.newyorker.com/talk/financial/2012/07/30/120730ta_talk_surowiecki>.

8. Waggoner, John. "USA TODAY." USATODAY.COM. N.p., 18 July 2012. Web. 20 Apr. 2013.

<http://usatoday30.usatoday.com/money/perfi/credit/story/2012-­07-­18/libor-­interest-­rate-­scan

dal/56322230/1>.

Charts

Chart 1Board Members

Sir David Walker David Booth Antony

Jenkins

Tim Breedon CBE Chris Lucas Fulvio

Conti

Simon Fraser Dambisa Moyo Reuben Jeffery III

Sir Michael Rake Sir Andrew Likierman Diane de Saint

Victor

Sir John Sunderland