December 6, 2023

DealBook: British Regulators Plan Major Overhaul of Rate System

Martin Wheatley, managing director of the Financial Services Authority, the British regulator that will conduct the review into the rate-setting process.Jerome Favre/Bloomberg NewsMartin Wheatley, managing director of the Financial Services Authority, the British regulator that will conduct the review into the rate-setting process.

LONDON – The system at the center of the rate-rigging scandal will be overhauled as regulators respond to public anger over the manipulation of the London interbank offered rate, or Libor.

Martin Wheatley, the British regulator in charge of overhauling the rate-setting process, outlined plans on Friday that could lead to wholesale changes to Libor, which is used as a benchmark rate for more than $360 trillion of financial products, including mortgages and loans.

The reforms may lead to the scrapping of the current system, which is overseen by the British Bankers’ Association, a trade body, and making it a criminal offense to manipulate benchmark rates.

“The existing structure and governance of Libor is no longer fit for purpose and reform is needed,” said Mr. Wheatley, who is managing director of the Financial Services Authority, the British regulator. “Trust in a vital part of the financial system has been badly damaged and timely action is needed to restore it.”

The tough words from British authorities come after one of the country’s biggest banks, Barclays, agreed to a $450 million settlement with American and British officials after some of its traders and senior executives were found to have manipulated the rate for financial gain.

A number of other global financial institutions, including Citigroup and HSBC, are under investigation for their role in the scandal. Analysts estimate the combined fines and penalties for the financial services industry may total more than $20 billion.

Mr. Wheatley is in charge of a British government review of the Libor-setting process, which will offer recommendations in late September about how the rate could be changed.

On Friday, the British regulator said the inquiry was likely to lead to major changes to Libor, including the use of actual trading data to set the daily benchmark rate.

Currently, a number of banks are polled each day about what their lending costs may be if they tapped the financial markets for financing. During the recent financial crisis, so-called interbank lending between firms was drastically curtailed, which led bank executives to submit incorrect data for Libor, according to regulatory filings.

“Libor is also intended to represent unsecured interbank borrowing costs for a range of maturities, but as this type of lending has severely declined since the financial crisis, submissions are more heavily reliant on judgment,” Mr. Wheatley said.

The review will center on potential criminal sanctions against individuals that manipulate the rate. American and British authorities are currently considering the prosecution of traders implicated in the scandal, though European officials want to write new legislation to make the manipulation of Libor and other benchmark rates a criminal offense.

The overhaul of Libor also will focus on increasing governance of the rate-setting process, after authorities found deficiencies in how the system was overseen. In discussions dating back to 2008, American and British central bankers had raised concerns with the British Bankers’ Association about how the rate was governed. In response, authorities forced the trade body to increase the auditing of banks’ Libor submissions from late 2008 to improve transparency.

“Any new governance framework should ensure that the compilation process itself is subject to a much greater degree of independence, transparency and accountability,” Mr. Wheatley said on Friday.

British authorities said they would be working with American and other international counterparts as part of the wide-ranging review. Banks are expected to provide feedback on the potential reforms by early September.

With regulators continuing their investigations into the activities of global firms, banks are likely to face pressure to support the changes to Libor.

“The past few months have presented a series of very significant reputational challenges for the financial services industry,” Mr. Wheatley said. “It’s clear from the reaction to the Libor scandal that consumers think it’s important.”

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DealBook: Barclays Chief Faces Political Firestorm

Robert E. Diamond Jr., chief of Barclays, said the bank worked to fix problems and cooperated with the authorities.Jerome Favre/Bloomberg NewsRobert E. Diamond Jr., chief of Barclays, said the bank had worked to fix problems and cooperated with the authorities.

The Barclays chief executive, Robert E. Diamond Jr., faced a political backlash on Thursday, a day after the British bank agreed to pay more than $450 million to settle accusations that it had attempted to manipulate key interest rates.

Several current and former politicians took aim at Barclays over the matter on Thursday, with some calling for him to resign. The cacophony of criticism comes as Mr. Diamond deals with shareholder opposition about his pay.

“I think the whole management team have got some serious questions to answer,” said Prime Minister David Cameron, speaking at an event in Northern England. “Who was responsible? Who was going to take responsibility? How are they being held accountable?”

The bank’s shares fell 10.6 percent in afternoon trading in London on Thursday.

Barclays is under scrutiny for attempting to influence key benchmarks, including the London interbank offered rate, or Libor, to bolster its own bottom line. Such rates are used to determine the cost for a range of financial products, including mortgages, credit cards and student loans.

David Meister, the commission's enforcement director.Dave Cross PhotographyDavid Meister, the commission’s enforcement director.

On Wednesday, Barclays struck a deal with the Commodity Futures Trading Commission, the Justice Department and the Financial Services Authority in London, in the first settlement in a sprawling investigation into whether big banks improperly set key interest rates. Mr. Diamond, in a statement on Wednesday, underscored the changes at Barclays, saying “today’s resolutions relate to past actions which fell well short of the standards to which Barclays aspires in the conduct of its business.”

The settlement is also likely to spur reform. As part of the settlement, Barclays agreed to adopt new measures and controls.

On Thursday, the British Bankers’ Association, the trade body that oversees Libor, said it had asked the authorities to review how the interbank rate was set. Until now, the organization had avoided government involvement by conducting its own review into the process, which mainly relies on the world’s largest banks to provide the figures that underpin Libor.

Politicians are pushing for accountability at Barclays. Andrew Tyrie, chairman of the treasury committee for Britain’s House of Commons, said it would summon Mr. Diamond as well as the heads of the Financial Services Authority, the British regulator, to answer questions on the issue sometime in the next four weeks. George Osborne, the chancellor of the Exchequer, similarly wanted answers.

Mr. Diamond, said Mr. Osborne, “has some very serious questions to answer. What did he know, and when did he know it? And who of the Barclays executives knew what was going on?”

“We all want to hear his answers,” Mr. Osborne told Parliament on Thursday. “The story of irresponsibility is not over yet. What happened at Barclays and at other banks is completely unacceptable. It is systemic of the financial industry that put greed above other interests.”

The fallout from the regulatory mess follows an earlier firestorm over executive compensation. Amid mounting criticism from shareholders about excessive pay, Mr. Diamond and other Barclays executives said in April that they would give up some of their annual bonuses if certain profit goals were not met.

Mr. Diamond will now forgo his entire annual payout, announcing on Wednesday that he and others would give up their bonuses in light of the legal issues.

The problems may continue to mount for Barclays. Mr. Osborne, in his speech, said the authorities would continue to look into the matter and were pursuing every avenue open to them. The Labour leader Ed Miliband echoed the need for justice.

“This cannot be about a slap on the wrist, a fine and the forgoing of bonuses. To believe that is the end of the matter would be totally wrong,” Mr. Miliband said in a speech. “When ordinary people break the law, they face charges, prosecution and punishment. We need to know who knew what when, and criminal prosecutions should follow against those who broke the law.”

Some even argued that Mr. Diamond should step down — or that the board should take action.

“If Bob Diamond had a scintilla of shame he would resign,” a former Liberal Democrat Treasury spokesman, Lord Oakeshott, said in an interview with the BBC. “If Barclays’ board had an inch of backbone between them they would sack him.”

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DealBook: Lenovo to Buy Medion, a German PC Maker

Yang Yuanqing, chief executive of Lenovo.Jerome Favre/Bloomberg NewsYang Yuanqing, Lenovo’s chief executive.

6:28 p.m. | Updated

Lenovo, the Chinese computer maker that bought I.B.M.’s PC division six years ago, said Wednesday that it planned to take control of a German consumer electronics manufacturer, Medion, in a deal valuing the company at $909 million.

Lenovo said the acquisition would double its share of the German PC market, where it would become the third-largest player after Acer and Hewlett-Packard. The deal, expected to close in the third quarter, would be the first time a Chinese company has bought a well-known German brand like Medion, which supplies computers and other devices to the discount chain Aldi.

Yang Yuanqing, chief executive of Lenovo, said the company planned to combine “this ‘front end’ with Lenovo’s ‘back end’ manufacturing capability and supply chain” in a push further into Europe.

The move will give Lenovo 14 percent of the German PC market and about half that share for the PC market in Western Europe, the company said. It resembles Lenovo’s landmark 2005 deal in America, when it bought the ThinkPad PC division of I.B.M. for $1.75 billion.

Gerd Brachmann, chairman of Medion, agreed to sell two-thirds of his 60 percent stake in the company. He will be paid in cash for 80 percent of the shares he is selling and receive 20 percent in Lenovo shares. That would give him about 1 percent of Lenovo, the world’s fourth-largest PC maker after H.P., Dell and Acer.

Both the Lenovo and Medion boards have approved the deal. Lenovo said the acquisition was contingent on an additional 15 percent of Medion shares being tendered by investors other than Mr. Brachmann. The transaction, subject to regulatory approval, will be financed with Lenovo’s cash reserves.

Shares of Medion rose 1.95 euros, or almost 18 percent, to close at Lenovo’s offering price of 13 euros ($18.69).

Founded in 1983 by Mr. Brachmann, Medion is based in Essen, Germany, and employs about 990 people. It reported net income of 4 million euros for the first quarter, up from 3 million euros for the comparable period a year earlier, but sales declined to 371 million euros in the first quarter this year from 411 million euros in the period a year earlier.

Lenovo hired Barclays Capital as its financial adviser. The company last week reported sales of $21.6 billion for the year ended March 31.

The largest shareholder in Lenovo’s parent company, Legend Holdings, is the Chinese Academy of Sciences, a government research institute. An employee group and the conglomerate China Oceanwide also hold major stakes.

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