By Cliff D'Arcy | Fool.co.uk – Fri, Jun 29, 2012 15:16 BST

Companies:

Symbol	Price	Change
BARC.L	164.75	-3.45
RBS.L	201.50	-5.70
C	26.36	-0.48
LLOY.L	30.30	-0.52

British bank Barclays (LSE: BARC.L - news) is dead centre of a storm involving the manipulation of inter-bank lending rates, particularly Libor (the London Inter Bank Offered Rate).

What is truly breath-taking is the sheer scale of this fraud.

According to one estimate, around $350 trillion (£223 trillion) of lending and derivatives is priced off Libor. That’s enough to pay for the whole of UK Government spending for around three centuries at current levels. Thus, if misconduct by banks caused Libor to increase by a mere one tenth of one basis point (0.001%), this amounts to $35 billion (£22 billion) a year in extra interest – that’s roughly the UK’s annual budget for transport and close to as much as council tax brought in last year.

One official claims that 20 other banks helped to rig interest rates and that Barclays is poised to 'blow the whistle' on wrongdoing at its co-conspirators. It's also likely that criminal charges could be brought against the ringleaders of this worldwide fraud.

Due to the vast scale of this illegal activity, Libor lawsuits, fines and damages could be an existential threat to Barclays and other banks. Shareholders should forget about the damage to banks' reputations, which are already in the gutter. Instead, they should worry about the very future of the banks involved.

Think about this: class-action lawsuits in the US and mass lawsuits in the UK from mortgage borrowers, loan customers and millions of businesses, all of which paid more interest because of this fiddling of Libor. Scary stuff, agreed?

Wrongdoing at Barclays

The big boys at Barclays were very naughty. In misconduct described as "serious, widespread and extended over a number of years", the FSA said that Barclays' bad behaviour involved a considerable number of employees. Hence, the FSA had no choice but to hand Barclays the largest fine ever levied in the regulator's history.

Worse still, American regulatory authorities slapped even larger fines on the bank. The US Commodity Futures Trading Commission imposed a penalty of $200 million on Barclays in settlement of attempted manipulation and false-reporting charges. Also, in an agreement with the US Department of Justice, Barclays admitted misconduct and agreed to pay a further fine of $160 million.

In all, these three hefty fines total around £290 million, or roughly 2.4p for each of Barclays' 12.2 billion shares in issue.

The great Libor fiddle

What Barclays' staff did was remarkably simple.

To help the bank's trading positions between 2005 and 2009, and most notably during the global financial crisis of 2007-09, the bank made false submissions to the Libor-setting committee, which agrees rates daily in London.

At the request of its own traders of interest-rate derivatives, Barclays made false submissions relating to Libor and Euribor (the eurozone benchmark rate). By doing this, Barclays personnel aimed to help their trading colleagues to profit by manipulating Libor.

Rigging the world's leading benchmark for interest rates is pretty serious stuff. Indeed, in the words of the FSA, "Barclays' behaviour threatened the integrity of the rates, with the risk of serious harm to other market participants".

As a result, Bob Diamond, Barclays' chief executive, has agreed to forego his yearly bonus in 2012 (it was £2.7 million for 2011), as have senior executives Chris Lucas, Jerry del Missier and Rich Ricci.

Many Libor lawsuits to come

In other market-rigging scandals, it is very rare to see only one party involved. Indeed, when investment bankers see their rivals making money hand over fist, they are all too keen to board this bandwagon -- even if the actions involved are banned.

Thus, these fines handed down to Barclays are surely only the tip of the iceberg. There's an old saying that goes: "There's never only one cockroach under the fridge," and the same warning applies to bad bankers.

Therefore, I expect other banks -- in the UK, US and elsewhere -- to be engulfed by this scandal. If any of the global banks, such as HSBC (LSE: HSBA.L - news), JP Morgan Chase or Citigroup (NYSE: C - news) admit similar charges, then their fines could dwarf those levied on Barclays.

Furthermore, although Barclays has settled with UK and US regulators, there will be many more civil -- and even criminal -- lawsuits in the pipeline. This threat should trouble shareholders in HSBC, Lloyds Banking Group (LSE: LLOY.L - news) and Royal Bank of Scotland (LSE: RBS.L - news), as all three British banks have been named in Libor lawsuits.

Bank shares slammed

With this scandal now out in the open, spooked bank shareholders raced for the exits.

Here's how the shares of the Big Four banks have performed since news of these settlements broke on Thursday (from largest to smallest fall):

Bank	Weds close	Thur close	Change (%)
Barclays	196.05	165.6	-15.5%
RBS	233.1	206.4	-11.5%
Lloyds	31.16	29.94	-3.9%
HSBC	573	558.2	-2.6%

As you can see, Barclays and RBS shares got hammered on Thursday, losing nearly 16% and 12% respectively. Lloyds got away with a 4% drop, while HSBC slid less than 3%.

Shunning bank shares

Even five years after the credit crunch arrived, the banking world is still not back to 'normal', which is why I avoid UK banks like the proverbial plague. I don't own any bank shares today and have bought none since 2007.

Britain's biggest investor, Neil Woodford -- who manages £20 billion of our money for Invesco Perpetual -- also shuns bank shares. To find out which great British businesses Woodford is buying, read "Eight Shares Britain's Super-Investor Owns". For more about these eight money-making machines -- and Woodford's magnificent mind and methods -- download your free copy of this report today.

Without doubt, the rigging of Libor is shaping up to be the most serious financial scandal of the 21st Century. Indeed, if criminal charges succeed against any bank involved, then they could well spell the end of that institution. So, watch this space...