Barclays Bank Fraud Charges

This report introduces the banking institution and the current fraud issue faced by Barclays Bank Plc. It summarises the main agenda of the report where it highlights the charges against Barclays bank and its executive. The introduction puts into perspective the view in which the report is drafted from a financial manager’s perspective.

The report gives the main features of the 2008 financial crisis to provide a basis on which to introduce the Barclays bank involvement with the alleged fraud case. It gives a detailed hypothesis of the possible cause of the 2008 financial crisis. The report attempts to disclose the scenario the banks and financial institutions faced during the 2008 financial crisis. It also provides the effects and implications of the 2008 financial crisis to the banking sector.

The report also explains the reasons why Barclays bank needed additional capital. It also gives detailed reasons why Barclays bank opted not to be bailed out by the United Kingdom government during the 2008 financial crisis. There is a highlight of the investors who contributed to the additional capital and the specification of the investor and investment directly linked to the fraud charges faced by Barclays bank and its executives.

The report also gives the reasons why the serious fraud office considers the decisions taken by the bank executives are considered unlawful. It highlights the actions taken by the bank executives and why they are considered unlawful.

The report offers valid recommendations to the banking sector. These recommendations seek to avert the occurrence of another banking fraud by the banks and their executive employees.

Barclays Fraud Charges

Introduction

Banking has been part and parcel of the everyday financial transactions for decades. However, the banking sector has not been without challenges related to the actions by existing banks. This report aims to analyze the criminal charges related to the 2008 financial crisis in which former senior Barclays executives were charged with fraud.  The charges also relate to the bank in raising additional capital during the financial crisis. The report gives a detailed perspective view as a financial manager working for Barclays bank on the implications of the Qatar case involving John McFarlane, the chairman of Barclays PLC.

Main features of the 2008 financial crisis and its implications for the UK banking Sector

The events, causes, and effects of the 2008 financial crisis are still vague to the UK’s economic and banking sector today. The events of the 2008 crisis have ultimately contributed to the shaping of the current banking sector, businesses, and the public sector. The effects of the 2008 crisis also had an adverse ripple effect to the entirety of Europe and across the world.

The onset of the 2008 financial crisis was influenced the deregulation of the financial markets which occurred way back in the 1970s but gained track in the 1980s. The deregulation of the financial markets swept across Europe and the United States economies making it possible for banks and trade organizations to expand their geographical operation territories and investments rapidly. Before the deregulation of the financial markets, the merchant or rather the current investment banks in the United Kingdom and other organizations and companies mainly operated under a specific restricted geographical area (MALLIARIS, A.2016, 68). Such restricted spheres of operations made it difficult for banks and other organizations to expand their capital ratios hence forced a very limited the amounts of depositor’s cash that could be loaned out to their customers. When these controls were done away with by the deregulation of the financial markets, the banking and financial institutions had an opportunity to expand their financial markets across the globe thus eliminating the sole dependency of depositors to be able to expand their lending and subsequently their growth (RYDER, N 2017, 78).

The lucrative property investments markets fueled the main problem that lighted the 2008 financial crisis. The investments in the home mortgage and real estate to let were increasingly becoming popular and profitable to banks and financial institutions in the United Kingdom and across the world. Banks were very anxious to venture into the property sector to expand their market shares. The ambition was overvalued as banks, and other lending and financial institutions offered loans that were in equivalent to the underlying property value and sometimes a seventh-fold of the borrower’s income (SAVONA, P.2016, 72). Such aggressive lending by banks and financial institutions was risky, and its implications were extremely underestimated while focusing o the potential for high returns. The risk and reward promise of the mortgage and property sector investments influenced some organizations, banks and financial institutions to undertake securitization where they sold off bundles of their mortgage and loan deals to new lenders who did not have an underlying knowledge of the original transactions.

In the early and mid-2007, there was a rise in the global oil prices and fears of a trade recession which lead to a sharp rise in unemployment. The rate of unemployment consequently increased resulting in a significantly high rate of default in mortgage payments. Bad debts developed into a financial crisis as banks were very worried about their mortgage investments hence becoming reluctant to offer to lend to other banks or individuals. The depositors from which the bank had borrowed to lend and invest in the property sector were increasingly demanding their money which the banks could not meet the deposit thresholds (TSANG, C 2017, 92). The United Kingdom government had to step in to rescue the situation by nationalizing societies like Bradford and Bingley and the Royal Bank of Scotland.  The financial crisis also had to force Halifax Bank of Scotland to merge into the Lloyds TSB group into a combined business. The implications resulted in the lending interest rates remaining very high and a great reduction in the offering of co-operating credits and the reluctance of the banks investing in the property sector (WALLISON, P 2016 32).

Why Barclays needed to raise additional capital in 2008

With the existing financial crisis in the United Kingdom, Barclays PLC needed to raise additional capital. The Board of Directors proposed to raise a figure of £7.3 billion apart from the existing investments at the time. With the onset of the United Kingdom’s governments bail out of the Lloyds above and the Royal Bank of Scotland, Barclays Bank opted to raise additional capital independently from private investors and individuals rather than opting for the taxpayer’s money (EICHACKER, N. 2017, 282). The main reason why Barclays needed to raise the additional capital was with an aim to maintain the pretense of greater liquidity. Barclays also wanted to provide an opportunity for interim institutional shareholders to participate in the subscription of mandatory convertible notes (LIEVEN, P. 2016, 42).

Barclays bank needed to strengthen their links with the existing shareholders amid the global economic concerns regarding the looming recession. Barclays also had a vested interest in influencing their existing shareholders to introduce new investors. The move by Barclays to raise capital was also to ensure that Barclays meets a higher capital target that was set by Britain’s Financial Services Authority at the time. The shares of Barclays were also down by 17% in the stock market share indexing as there were concerns that the global economic market was about to fall into recession (WALLACH, P 2015, 173). Barclays bank thus opted to raise additional capital to avoid the need for the government to buy shares instead of their investors supporting the bank to raise the capital.

The additional capital came from several investors. The investors included a state-owned investment fund and Qatar holdings. One of the main investments was to Qatar Holding which issued a £3billion Reserve Capital Instruments. This Reserve Capital instrument was to pay an Annual coupon rate of 14% with an additional subscription of a nominal consideration for warrants. The investment enabled Qatar holdings to represent 18% of the ordinary capital share. These investors allowed Barclays to retain its independence at the time while other baking competitors were being bailed out by the government (BAYOUMI, T 2017, 108).

Why Serious Fraud Office considered the actions taken by the Bank executives may have been unlawful?

The action by Barclays executives to raise additional capital later attracted some legal fraud issues. The fraud office considered the actions taken by the Barclays bank executives as unlawful. Barclays Bank PLC was charged with unlawful financial assistance related to the additional capital assistance by Qatar Holdings. The allegation was that the loan by the Qatar state-owned holding company was used either directly or indirectly to unlawfully acquire shares from Barclays PLC in a bid to give unlawful financial assistance. Several former Barclays bank officials were charged about the investigations regarding the unlawful financial assistance (KEEN, S. 2017, 132).

The former Barclays bank executives were charged with conspiracy to commit fraud against the bank pending further investigations. The allegations were about the activities that took place during the event of the 2008 financial crisis and the call by the Barclays executives to raise additional capital in a bid to opt out of the government bailout (BOOKSTABER, R. 2017, 66). The executives were accused of making undisclosed amounts of payments to Qatari investors as part of their contribution to the additional capital investment during the 2008 financial crisis. The actions and decisions taken by the former Barclays bank executives are considered unlawful by the Serious Fraud office (HSU, S. 2017, 18).

Recommendations

It is important to consider a workable solution that can be recommended by banks to avoid such a situation from occurring again in banks. The most appropriate recommendation is to limit the powers of the bank executive. Such measure to limit the powers of the bank executive should devolve the sole decision-making powers from the executives to a more diverse board of directors. The board of directors should constitute a well-balanced team of professionals who will cover all the aspects of banking. The board of directors should constitute a legal, financial, economic and any other relevant field that will assist in decision making. The banks make the decision should be thus well analyzed and possibly voted by the board of directors instead of a single sole decision making by the executives.

The stakeholders and the government should also be involved in the group decision making by the board of directors. The use of a liable team in decision making will reduce the chances of fraud cases in banks. The banks should always disclose all information pertaining its transactions and investments to its stakeholders, partners, and investors. It is also important for the board of directors to investigate and do proper research on any investment deal or offer they are planning to undertake to avoid future fraud problems on the bank or its employees.

Conclusion

The financial crisis of 2008 was devastating to the banking, organizations and financial institutions. It is important to learn lessons from the experience of the past. The banking and financial sector should take lessons from the actions of the Barclays bank case to avoid future legal problems and thus, every banking and financial institution is liable for its actions and their investors.

References

BAYOUMI, T. A. (2017). Unfinished Business: the Unexplored Causes of the Financial Crisis and the Lessons Yet to Be Learned. New Haven Yale University Press.

BOOKSTABER, R. (2017). The end of theory: financial crises, the failure of economics, and the sweep of human interaction. Princeton (New Jersey), Princeton University Press.

EICHACKER, N. (2017). Financial underpinnings of Europe’s financial crisis: liberalization, integration, and asymmetric state power. http://search.ebscohost.com/login.aspx?direct=true&scope=site&db=nlebk&db=nlabk&AN=1617379. Cheltenham, UK: Edward Elgar Publishing.

HSU, S. (2017). Financial crises, 1929 to the present. Cheltenham, UK: Edward Elgar Publishing.

KEEN, S. (2017). Can we avoid another financial crisis? Cambridge, Polity Press.

LIEVEN, P. (2016). Rating Agencies and the Fallout of the 2007-2008 Financial Crisis. Frankfurt am Main Lang, Peter Frankfurt

MALLIARIS, A. G., SHAW, L., & SHEFRIN, H. (2016). The global financial crisis and its aftermath: hidden factors in the meltdown. New York, Oxford University Press.

RYDER, N., TUCKER, J., & TURKSEN, U. (2017). The financial crisis and white-collar crime - legislative and policy responses: a critical assessment. Abingdon, Oxon; New York, NY: Routledge.

SAVONA, P., OLDANI, C., & KIRTON, J. J. (2016). Global Financial Crisis Global Impact and Solutions. Florence, Taylor, and Francis.

TSANG, C.-P. (2017). HOUSING MARKET BUBBLING AGAIN AFTER THE GLOBAL FINANCIAL CRISIS IN 2008: government’s actions... to prevent the bursting of the housing bubble. [S.l.], OPEN DISSERTATION PRESS.

WALLACH, P. A. (2015). To the edge: legality, legitimacy, and the responses to the 2008 financial crisis. http://public.eblib.com/choice/publicfullrecord.aspx?p=1969535      Washington, D.C.: Brookings Institution Press.

WALLISON, P. J. (2016). Hidden in plain sight: what caused the world’s worst financial crisis and why it could happen again.         New York: Encounter Books.