Barclays Fine Signals Fraud In $350 Trillion Lending Market (Update 1)

Updated with British Bankers Association comments, trader correspondance.

NEW YORK (TheStreet) --Barclays(BCS) has agreed to pay regulators in the U.S. and Europe almost $500 million to settle a probe of its manipulation of key benchmark rates known as Libor and Euribor that appear to stretch from the banks trading desks to senior management.

A manipulation of the rates may have unfairly impacted the borrowing costs of homeowners, governments and corporations around the world, as the bank allegedly tried to profit or curb losses tied to floating interest rates at the height of the financial crisis.

In three separate penalties, Barclays will pay the Commodity Futures Trading Commission, the U.S. Department of Justice and the U.K.'s Financial Service Authority a total of $454 million. In the CFTC's settlement, Barclays traders - with the assistance of senior management -- are accused of attempting to manipulate the bank's true funding costs, which are key to setting short-term interest rates that are used in roughly $350 trillion of financial market contracts.

According to the CFTC, Barclays traders and employees responsible for determining the bank's LIBOR and Euribor funding costs attempted to manipulate and falsely reported the benchmark interest rates to bolster profits or minimize losses on derivatives trades. Starting in 2005 Barclays's manipulation "occurred regularly and was pervasive" and involved the bank's traders in New York, London and Tokyo, in addition to "high levels of management within Barclays Bank," said the CFTC in its settlement order.

During the financial crisis between August 2007 and early 2009, Barclays is accused of making artificially low Libor submissions to protect the bank from negative market and media perceptions concerning its funding costs, with instructions coming from Barclays' senior management, the CFTC said. In addition, they accuse Barclays' European traders of aiding and abetting traders at other banks in each other's attempts to manipulate Euribor.