Last updated: July 28, 2014 8:31 pm

Every little hurts as Lloyds traders scam an Old Lady

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Scam is most dispiriting in scandal over benchmark manipulation

Those Lloyds traders are no muppets. Bank jobs are tough, which is why safe crackers are among the aristocrats of the underworld. But robbing the Bank of England is well-nigh impossible, what with its impregnable vaults and forbidding receptionists.

Two Lloyds traders managed it without even using gelignite.

Their scam, revealed following a £226m settlement with regulators, is the most dispiriting so far in the scandal over benchmark manipulation. They fiddled rates to reduce the fees Lloyds paid for liquidity support from the BoE during and after the financial crisis.

The cost to the taxpayer was modest, at up to £7.76m. But short changing the public for part of the bailout that helped save Lloyds was like a bankrupt picking the pocket of a charitable benefactor.

The BoE propped up Lloyds and Halifax Bank of Scotland, with which it merged, by lending creditworthy UK Treasury bills in return for such illiquid horrors as mortgage-backed securities. The banks used the bills as collateral to borrow on the repo market. The Old Lady’s fees were calculated as the value of bills lent multiplied by the spread between the repo rate and the higher sterling Libor rate.

Four traders at Lloyds and HBOS submitted artificially high estimates of the three-month repo rate to a benchmark fix, thereby narrowing the spread and lowering fees. Any personal benefit would have been indirect. In contrast, traders at both banks who sought to manipulate Libor rates to suit trading positions stood to get higher bonuses.

The assertion that no senior managers knew about repo rate massage should be tested as part of a criminal investigation, perhaps in the ambit of the Serious Fraud Office’s probe of Libor fixing.

Lloyds says it is sorry. But not within a statement that characterises employees’ misdeeds as “legacy issues”. Tone matters in a scandal where traders’ backchat resonates more loudly than financial complexity. One trader quoted Tesco’s motto: “every little helps” to justify rate manipulation. For the banks, as revelations proliferate, every little hurts.

Monkey business

Going cold turkey is the cleanest, if toughest, way of shedding an addiction. Reckitt Benckiser plans to demerge a pharmaceuticals division best known for making heroin substitutes for recovering addicts. An alternative was to wean itself off the declining revenues of Reckitt Benckiser Pharmaceuticals by floating the business for cash, while retaining a stake from which dividends would flow.

It will be great to get straight, to paraphrase Black Grape, a druggy rock band with a low propensity for following its own advice. RBP has been a long-running distraction for the consumer products group, which reputedly struggled to extract a decent price from potential trade buyers. A demerger within the next 12 months will allow management to focus on core businesses such as condoms and household cleaners.

RBP will be an anomaly as a small, separately listed specialist in addiction treatments. The unit made an operating profit of £183m on sales of £344m in the first six months, 21 per cent and 8 per cent of group totals. The difficulty of valuing RBP is reflected in the wide range of market valuations – £1.1bn to £4.5bn – cited by Martin Deboo of Jefferies.

At an average valuation of £2.6bn the multiple of forward earnings before nasties would be an undemanding 7.4 times. RBP is fighting a rearguard action against generic competition for key treatments such as Suboxone, despite its owner’s efforts to talk up new products. A rival may eventually acquire the independent, perhaps to exploit a tax inversion play. That would get the monkey off investors’ backs too.

Passionate Parker

Mothercare knows best. Investors agreed with chairman Alan Parker that an offer at 300p per share from Destination Maternity was opportunistic. The US bump upholsterer has slung its hook and Mr Parker has joined The Pasionara Club (this Spanish revolutionary’s battle cry was: “they shall not pass!”).

Other members are Gerald Corbett of Britvic and Christian Brown, formerly of Kentz, who also fended off low ball bids for companies they led. They were vindicated when they sold for more or saw the shares exceed the bid price.

Mr Parker needs to do the same. But the business model looks weak, the finance director has quit and a rights issue may be needed. Critics say pay for new chief executive Mark Newton-Jones should be linked to the shares, postnatally depressed at 238p each, exceeding 300p. The real issue is whether Mr Parker should continue as chairman if they do not.


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