Bank rate rigging scandal widens; Diamond fights on

A scandal over the rigging of key interest rates could create a legal morass that may hamper the global banking industry for years, analysts said, as the head of Barclays fought to hold onto his job. With the Times newspaper naming RBS as the next bank facing a fine for its alleged involvement in manipulating the key lending rate between banks, the head of the Bank of England said there needed to be "real change" in the industry's culture.

"That will require two things. One is leadership of an unusually high order and changes to the structure of the industry," Mervyn King told a news conference, adding he hoped that the UK parliament would legislate as soon as possible.

US and British authorities fined Barclays $453 million on Wednesday for manipulating the London interbank offered rate (Libor), which underpins some $360 trillion of loans and financial contracts around the world - and analysts forecast more banks would soon be named for collusion.

"Reading the statements by the authorities we expect to get settlements by others in the course of time which could be more punitive," analysts at Credit Suisse said. Others predicted Barclays and other banks could face billions in costs from litigation, especially in the United States, in much the same way that oil major BP ran into drawn-out legal rows over its oil spill.

"Given the long-tailed nature of investigations we expect this to be a long-term overhang," said Morgan Stanley analyst Chris Manners.

The Times said RBS faced a likely fine of £150 million ($233 million) for participating in market manipulation offences similar to those engaged in by Barclays. But the heaviest pressure remained on Barclays chief Bob Diamond, who was running the investment banking arm Barclays Capital when the rigging occurred in 2005-2009, despite his vow not to quit.

"Politicians have already been baying for blood and calling for the head of Bob Diamond, especially as he was in charge at BarCap at the time," said Stephen Peak, manager of the Henderson UK Alpha and European Absolute Return funds and a shareholder in the bank. "We feel that the Barclays board will instinctively wish to resist this, as Diamond is clearly the architect and leading light of Barclays, but feel that the pressure may be too great." Prime Minister David Cameron said Diamond and other bosses had some "big questions to answer". Britain also called in the fraud squad to investigate possible crimes. Diamond told Morgan Stanley analysts on Thursday he did not intend to stand down. He won few political friends last year when he told a parliamentary committee it was time for bankers to stop apologising. Barclays Chairman Marcus Agius is also coming under pressure to step down.

Spreading scandal
Authorities investigating the Libor scandal are looking at banks in Europe, North America and Japan. In response to the Times report RBS said it continued to co-operate with regulators on the ongoing investigation, adding any resolution of its case was months away.

"The process is not as far advanced as the (Times) article suggests and there can be no certainty as to the timing or amount of any fine or settlement at this point," the bank said in a statement.

The rate-fixing affair, which disclosed e-mails in which bankers appeared to promise bottles of champagne to each other for help in setting the rates, has fuelled anger from taxpayers struggling with austerity measures who are now closely watching the banks they bailed out during the financial crisis. Adding to their ire, the Financial Services Authority said on Friday it had found "serious failings" in the way specialist insurance had been sold by Barclays, RBS, HSBC and Lloyds, concluding they mis-sold products to small businesses. Compensation could run into the hundreds of millions of pounds, lawyers have said, although Lloyds said the cost for it would not be material.

The FSA said from 2001 to date, banks sold around 28,000 interest rate protection products to customers, although it did not did not say how much it would cost the banks. A string of mis-selling cases has damaged the reputation of the financial services industry for over two decades. Banks are already committed to paying upwards of £9 billion ($14 billion) to customers in compensation for mis-selling loan insurance.

Shares in Barclays eased another 0.5 percent on Friday after shedding 15 percent on Thursday. Overall the European banks index recovered 2.2 percent after Euro zone leaders agreed emergency action to cut Spain's and Italy's borrowing costs.

Kenya's U.S. envoy quits over rift with Washington NAIROBI, June 29 (Reuters) - The U.S. ambassador to Kenya has resigned just over a year after taking up the post, citing differences with Washington over priorities and his style of leadership, an embassy statement said on Friday. Scott Gration's departure came a week after the U.S. embassy warned of a threat of an imminent militant attack in the port city of Mombasa, angering the Kenyan government which said the advisory amounted to "economic sabotage". "Differences with Washington regarding my leadership style and certain priorities lead me to believe that it's now time to leave," Gration said in his resignation statement. A senior official in Kenya's Ministry of Foreign Affairs said the announcement was a surprise. Political analyst Mutahi Ngunyi said Gration, who had been with the U.S. State Department for three years, had often been too hasty in "pulling out his guns". "I think the ambassador had been a little gung-ho in his approach," Ngunyi said, giving the example of the Mombasa warning. On Sunday, two days after the U.S. warning and a day after a grenade attack in tourism hub Mombasa, Kenya's Secretary to the Cabinet, Francis Kimemia, said the embassy had reneged on an agreement not to issue the alert. There has been a surge in attacks on Kenyan soil blamed on Somali militants and their sympathisers since Kenya sent troops into Somalia in October last year. Increasing insecurity has hurt the country's tourism industry and threatens to dampen economic growth this year in the region's biggest economy. (Reporting by Richard Lough; Editing by James Macharia and Pravin Char)