Robert Diamond, former CEO

(BLOOMBERG) 

Flaws in the way Libor is set allowed individual banks to manipulate the key global interest rate for profit for years, according to traders.

While employees allegedly tried to rig the benchmark for $500 trillion of securities worldwide, they didn’t need to conspire with counterparts at other firms to affect where the rate was set each day, as some regulators concluded, said the people, one of whom lost his job for trying to distort the rate. By nudging their own firms’ submissions up or down in small increments they could boost the value of their trading books or cut their losses, said the people, who asked not to be identified because regulators are still investigating the Libor- setting process, according to  Bloomberg report.

The ability of a single bank to rig the London interbank offered rate also is highlighted by e-mails disclosed when Barclays Plc (BARC) paid a 290 million-pound ($452 million) fine to U.S. and U.K. regulators for manipulating the benchmark, and by academic studies. The settlement forced the resignations of the top three executives at Britain’s second-biggest bank by assets, including Chief Executive Officer Robert Diamond, 60.

“It is far easier to manipulate Libor than it may appear,” Andrew Verstein, a lecturer at Yale Law School, said in a paper to be published in the Winter 2013 issue of the Yale Journal on Regulation. “No conspiracy is required.”

Regulators in the U.S. and Europe are probing more than a dozen banks worldwide over alleged rate-fixing, with British prosecutors opening a criminal investigation on July 6. Barclays paid a record fine to settle the claims, and others are poised to follow. Deutsche Bank AG (DBK), Germany’s largest lender, may pay as much as $1.57 billion in penalties and legal costs and Edinburgh-based Royal Bank of Scotland Group Plc (RBS) $1.48 billion, according to estimates published last week by Morgan Stanley analysts Betsy Graseck and Huw van Steenis.

Barclays fell 3.4 percent to 156.70 pence, the lowest in almost eight months, as of 10.40 a.m. in London trading today. The stock is down 11 percent so far this year.

Regulators may be especially interested in cases where traders at several banks conspired to rig Libor, since this could subject the firms and traders to criminal antitrust charges and higher penalties. That banks could and did manipulate Libor on their own may also prompt regulators to target individual firms beyond Barclays for unilaterally distorting the rate.

Libor is determined by a daily poll carried out on behalf of the British Bankers’ Association that asks banks to estimate how much it would cost to borrow from each other for different periods and in different currencies. The rate, an indicator of the cost of money, is used to set prices for securities from mortgages to car loans. Similarly, Euribor, the euro-equivalent is overseen by the European Banking Federation in Brussels.

The so-called Chinese walls between traders and employees making interest-rate submissions on behalf of their banks were regularly breached, leaving the rate vulnerable to manipulation, Bloomberg News reported in February.