By Stephen Gandel
June 27, 2012

Fortune – U.K. bank Barclays agreed to pay $453 million to settle claims brought by U.S. and U.K. bank regulators and law enforcement officials that the bank participated in a scheme to fix two key lending rates, including the closely watched LIBOR, which affects as much as $350 trillion in loans and derivatives.

Of the $453 million paid by Barclays, $200 million was to the Commodity Futures Trading Commission, which is the largest civil fine levied by that regulator in history. The bank agreed to pay another $160 million to settle charges brought by the U.S. Department of Justice, and nearly $93 million to the U.K. Financial Services Authority.

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According to the settlements, Barclays bankers and traders regularly, and purposefully, misreported what it cost the bank to borrow money to an organization in London that tracks those rates. The settlement also says that Barclays colluded with other banks to manipulate their lending rates as well. The settlement says that the scheme was widespread at the bank, and included multiple traders on trading desks around the world. It also said multiple “senior managers” at the bank participated as well. No individuals were named in the settlements.

In a statement, Barclays CEO Bob Diamond said the conduct identified in the settlement did not meet the standards of his firm and that he and other top bank executives have volunteered to forgo their annual bonus for 2012. He said controls have been put in place to make sure similar actions don’t happen again.

The CFTC settlement says the lending rate manipulation occurred over four years, and goes back as far as 2005, but intensified during the financial crisis. In late 2007 and 2008, the rate Barclays was being charged to borrow money began to rise. That fueled speculation that the bank was in trouble. As a result, according to the CFTC, senior bank officials told those responsible for reporting the bank’s lending costs to submit a lower rate than the bank actually was paying. In late 2008, Tim Bond, who was Barclays chief strategist at the time, told Bloomberg television that he believed the overnight lending rates being reported by Barclays and others were made up.

It’s not clear how much Barclays profited from the manipulation or how much it cost borrowers and others. Bank lending rates are used to calculate LIBOR, which is a key factor in other borrowing rates set by banks. For instance, many consumer lending rates, from those on home equity lines of credit to auto loans, are often based on LIBOR.

Banks also regularly sold derivatives to municipalities and pension funds based on LIBOR, and took the other side of those trades. According to the settlement, Barclays traders regularly coaxed bank officials to manipulate the lending rate they reported, sometimes up and sometimes down, in order to boost the value of their trades. Among the evidence the CFTC and others gathered against the bank include a number of e-mails in which traders appear to openly talk about the lending rate fixing scheme. For example, in one e-mail uncovered by the CFTC, a Barclays trader wrote to a submitter: “We have another big fixing tom[orrow] and with the market move I was hoping we could set [certain] Libors as high as possible.”

Baltimore was sold as much as $300 million in LIBOR contracts. The city is the lead plaintiff in a class action against a number of banks, including Barclays. Baltimore’s suit does not specify how much the city lost. But another case brought on behalf of beneficiaries of retirement accounts that owned LIBOR-based securities against a number of banks says the manipulation of the rate created “hundreds of millions, if not billions, of dollars in ill-gotten gains” for the banks.

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“People taking out small business loans, student loans and mortgages, as well as big companies involved in complex transactions, all rely on the honesty of benchmark rates like LIBOR for the cost of their borrowings,” says CFTC chairman Gary Gensler. “Banks must not attempt to influence LIBOR or other indices based upon concerns about their reputation or the profitability of their trading positions.”

Regulators have been looking into allegations of LIBOR rate manipulation at Barclays and other banks for more than a year. Barclays is the first bank to settle charges, but Deutsche Bank has also disclosed that it has been the focus of investigations, and both banks have reportedly suspended dozens of traders related to the matter. Credit Suisse and UBS have also said that they are working with regulators on their LIBOR probes. CFTC officials thanked Securities and Exchange Commission officials in their press release, but declined to say whether the SEC would bring its own cases against Barlcays or other banks. CFTC officials also declined to say whether they would bring charges against individuals.

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