Lloyds Attacked by Carney as Bank Hit With $383 Million Fine

Jul 29, 2014 4:22 am ET

(Updates with today’s trading in 10th paragraph.)

July 29 (Bloomberg) -- Lloyds Banking Group Plc’s manipulation of key interest rates was branded “reprehensible” by Bank of England Governor Mark Carney as the lender agreed to pay 226 million pounds ($383 million) in fines and redress.

The U.K. bank, rescued by taxpayers during the financial crisis, will pay 105 million pounds to Britain’s Financial Conduct Authority, $105 million to the U.S. Commodity Futures Trading Commission and $86 million to the U.S. Department of Justice, according to statements yesterday. The lender also paid a further 7.8 million pounds in redress to the BOE after its traders’ actions cut the fees banks paid for an aid program of which Lloyds was one of the biggest beneficiaries.

“Such manipulation is highly reprehensible, clearly unlawful and may amount to criminal conduct on the part of the individuals involved,” Carney, 49, said in a July 15 letter to Lloyds Chairman Norman Blackwell that was released yesterday. In his reply, Blackwell pledged to make good all the BOE’s losses and called his traders’ behavior “truly shocking,” occurring when the bank was “on a lifeline of public support.”

Lloyds’s fine is the fifth-biggest of the seven firms to reach a settlement with U.S. and U.K. regulators probing how traders colluded to rig the London interbank offered rate and related benchmarks to profit from their own derivatives bets. UBS AG paid the most at $1.5 billion, including an agreement with Swiss regulators, while Barclays, the first to settle, paid $451 million and Royal Bank of Scotland Group Plc about $612 million, according to data compiled by Bloomberg.

‘Remuneration Implications’

The Justice Department filed a criminal wire-fraud charge yesterday as part of a deferred prosecution agreement. The charge will be dismissed after two years if Lloyds complies with the terms of the agreement, which requires the bank to cooperate with probes of current or former employees.

Libor is the benchmark interest rate for more than $300 trillion of securities worldwide ranging from student loans to mortgages. It’s one of a series of benchmarks in markets from gold to foreign exchange being scrutinized by regulators for possible manipulation by the banks that help set them.

The U.K. Serious Fraud Office’s Libor team is considering Carney’s comments about possible criminality in relation to cutting fees paid to the central bank, a spokesman for the agency said in a telephone interview. No Lloyds traders have been charged in the prosecutor’s wider Libor probe to date.

The first trial against an individual for Libor manipulation is set for January. The SFO has charged 12 ex- traders as part of its investigation.

The bank said in an e-mailed statement it “condemns the actions of the individuals responsible” and is considering “all the remuneration implications and potential actions available to it.”

‘Shock Horror’

Lloyds was little changed in London trading today, rising to 74.80 pence at 9:20 a.m. The stock is down 5.1 percent this year for a market value of about 53.6 billion pounds.

“The shock horror has gone out of the market,” said Chris Wheeler, a London-based analyst at Mediobanca with a neutral rating on Lloyds. “What’s gone on since Barclays was fined is the world has moved on. We’ve seen some enormous fines levied for other offenses, making this look quite small.”

The lender compensated the BOE after four traders manipulated the BBA Sterling Repo Rate between April 2008 and September 2009, Lloyds said. By pushing up the rate, they narrowed the difference between it and Libor, reducing the fees all banks would have to pay under the Special Liquidity Scheme, a plan put in place by the BOE to help British banks through the financial crisis.

‘Completely Unacceptable’

“The BOE is trying to make a statement here,” Wheeler said. “The BOE is taking a clear interest in the setting of Libor and making sure it’s being set appropriately.”

Lloyds employees sought to manipulate Libor to profit from derivatives and to make the bank look financially healthier than it was during the credit crisis, according to regulators. HBOS Plc, which Lloyds agreed to buy in 2008, also tried lowering its submissions to make itself look more attractive financially.

Lloyds and HBOS were the two biggest beneficiaries of the SLS program, the BOE said.

“The actions of these individuals between 2006 and 2009 are completely unacceptable,” Blackwell said in a statement. “Their behavior involved a gross breach of trust and we condemn it without reservation.”

Sixteen employees, seven of whom were managers, were either involved in or aware of Libor manipulation in various ways, according to the FCA. They were motivated by the fact the money market desk’s performance helped to determine their bonuses, according to the U.K. regulator.

“There was a culture on the money market desks of seeking to take a financial advantage wherever possible,” the CFTC said, adding Lloyds’s attempts to rig the rate were sometimes successful.

‘Like Tescos’

The FCA also said Lloyds traders colluded with counterparts at Rabobank NV, a Dutch bank that was fined $1.1 billion for interest rate manipulation last year. Manipulation of Yen Libor was compared with British supermarket chain Tesco Plc’s “every little helps” marketing slogan, according to a transcript released by the FCA.

“Every little helps... It’s like Tescos,” a Lloyds trader wrote on July 19, 2007, to a manager. “Absolutely, every little helps,” said the manager, whose identity was not disclosed in the transcript.

Lloyds received a 20 billion-pound bailout during the financial crisis, and taxpayers still own 25 percent of the lender. Antonio Horta-Osorio’s efforts to return the lender to full private ownership are being hampered by issues of past misconduct including selling insurance on loans to clients who didn’t need it. The bank is slated to report first-half results July 31.

--With assistance from Tom Schoenberg and Silla Brush in Washington and Scott Hamilton in London.