It's now well known that large British bank Barclays admitted to manipulating the benchmark Libor rate over a four-year period to make trades more profitable and to look stronger during the financial crisis.  

The bank moved quickly to settle with the U.S. Justice Department, the Commodities Futures Trading Commission, and London's Financial Service Authority. The regulators forced Barclays to pay $453 million in total fines and penalties, according to media reports, which is on top of the $155 million it says it spent on its internal investigation. The bank's reputation has taken a major hit, with regulators saying the misconduct can be traced all the way up to senior management.

To be sure, the scandal is among the more egregious misdeeds by a large bank at a time when such failures seem almost commonplace. The silver lining, however, is that Barclays' response to the crisis has been uncommonly adept, and may just offer some good examples of how companies should act after uncovering wrongdoing.

Before we look at the response to the crisis, let's recap what happened. There's little question that the rate was manipulated. In addition to statements by Barclay's top executives, there were also smoking-gun e-mails that contained evidence of manipulations. Exchanges between the bank's treasury function and traders, which should be separated by a Chinese wall, show whatever wall did exist was porous. When traders asked for manipulated rates, the responses were “for you, anything,” and “done for you, big boy,”—in turn prompting traders to reply, “you're a superstar” and “I love you.” Traders set up automatic calendar reminders about what rates they would be requesting going forward. When told to submit phony rates, one employee reportedly said the rates were “patently false” and another responded, “I will reluctantly, gradually, and artificially get my Libors in line.”

Crisis Management by the Book

Years ago, many companies that had steered themselves into a serious crisis, such as the one Barclays faced, took all the wrong actions, actually making things worse or even fatal. In recent years, however, senior managements and boards—often with sound tutelage from knowledgeable legal counsel and public relations professionals—have done a much better job at maneuvering through crises, taking actions that not only often save the companies, but in cases, enabled them to thrive going forward.

There's perhaps no better description of what not to do in a crisis than the list that Norman Augustine, the experienced and highly respected director and governance expert, assembled for a National Association of Corporate Directors report on risk management. Norman's list, titled “how to turn a crisis into a catastrophe in 12 easy steps,” mock advises those bent on destruction to:

1. Assume that evidence of a problem must be wrong.

2. When evidence mounts, cover up the problem.

3. Let lawyers manage the response strategy: admit nothing.

4. When the problem becomes public, minimize it.

5. Never display remorse: Blame someone else, preferably the victim.

6. Take plenty of time to resolve the problem.

7. Have the highest-level responsible individual go into hiding.

8. Attack the media.

9. Anger the politicians, preferably by embracing untenable positions.

10. Shift the spotlight to the failings of the regulators.

11. Frequently reverse your position and contradict yourself.

12. Give priority to saving money—that way you can lose large amounts later.

I can assure you from first-hand experience working with major companies that in past years such actions were indeed advocated by PR firms that hadn't yet seen the light. Over time it became clear that what does work, of course, is the exact opposite of the 12-step approach.

Barclays' senior management and board avoided many of the pitfalls that Augustine identifies and started down the appropriate path. Reports show:

Barclays acknowledged what had happened, cooperated extensively with authorities, and quickly agreed to a significant monetary settlement with regulators. Chief Executive Robert Diamond Jr. also said the right things, at least at first. He apologized, calling the bank's actions inappropriate, and told the public, “This kind of conduct has no place in the culture of Barclays.”

The bank initiated an independent audit into the bank's business practices, including “a root and branch review of all of the past practices” that have been “revealed as flawed” since the credit crisis started. The report will be made public and will influence the creation of a new code of conduct for the bank.

Diamond and three other senior executives agreed to forego their bonuses this year, and most of the traders involved in the scheme have left the bank.

These actions certainly represented a good start, but Barclay's knew more was needed, especially due to the insidious nature of the conduct and widespread implications, since Libor affects hundreds of trillions of dollars in securities and loans. In this case, Barclays knew it needed to do what some crudely refer to as “throwing a body on the fire.” Certainly the bank wanted to protect its chief executive, insolating Diamond from being the sacrificial lamb. So, it was the board chairman, Marcus Agius, who took the hit, or perhaps was nudged a little, as he “stood aside” from his chairman's post as a result of the scandal. Agius also was honorary chairman of the British Bankers' Association, the organization that oversees the Libor rate, and resigned that position as well.

The Best Laid Plans

Barclay's officials seem to have done a reasonably good job in dealing with the crisis. It admitted to and apologized for the wrongdoing, settled with the regulators, initiated an in-depth internal investigation with specified outputs and transparency, gave up bonuses, fired at least some of the culprits, and promised to do better in the future.

In recent years senior managements and boards have done a much better job at maneuvering through crises, taking actions that not only often save the companies, but in cases, enabled them to thrive going forward.

Barclays sought to insulate Diamond and hold him above the fray. Diamond's statements that he was “disappointed and angry” about the rate manipulation and that he was “disappointed because many of these behaviors happened on my watch,” supported the notion that while taking responsibility as CEO, he wasn't directly involved. An important aspect of the strategy to save Diamond was the resignation of Agius, who presented himself as the bank's leader and “ultimate guardian of the bank's reputation.” “The buck stops with me,” Agius declared upon resigning.

Nonetheless, pressure on Diamond continued to build. A Bank of England official called for Barclay's senior management to be held accountable, and major shareholders said Diamond should be replaced. And then, as always seems to occur with these kinds of scandals, more inside news oozed out. It was revealed that Diamond, in 2008 as head of Barclay's investment banking unit, was informed of concern by Bank of England officials regarding rates Barclays was reporting. Diamond huddled with direct reports, and the message they heard and conveyed downstream was to artificially lower the reported rates. Three other senior executives were reportedly involved, including the bank's COO, Jerry del Missier. Although insiders insisted Diamond's connection was only “miscommunication,” the pressure was too great. Several days after the settlement with regulators was announced, he submitted his resignation, effective immediately, and del Missier soon followed.

Unfortunately for Barclays, on top of losing senior leaders, including del Missier, the fallout will continue. British politicians are calling for action and some are urging shareholders to toss out Barclay directors for “systemic abuse.”  The Federal Bureau of Investigation is also investigating 14 Barclays' traders at the heart of the rate scandal, and similar action in the United Kingdom is likely, with Britain's Serious Fraud Office saying it is considering criminal prosecutions for Barclays' financial market manipulation.

The wider banking industry is feeling the heat of the Libor manipulation. The chairman of the Financial Services Authority said the scandal has been a “huge shock to the reputation of the banking industry,” and warns “more heads will roll.” The Royal Bank of Scotland last year fired four traders over their alleged role in Libor fixing. Lloyds Banking Group said it dismissed staff over the issue, and now regulators reportedly are looking at the activities of Bank of America, Citigroup, JPMorgan Chase, UBS, and HSBC. In addition to civil actions, criminal charges may be brought against bank executives with the threat of prison time. And lawsuits have begun, with municipalities, pension funds, and hedge funds saying they lost money in the labor scandal and want payback. The regulators themselves are also on the hot seat, with congressional and parliamentary committees investigating their actions, or lack thereof.

So, while Barclays has gone by the book in managing this crisis, and had a reasonably good plan for damage control, it still lost its top executives and saw its reputation badly tarnished. How it and other banks in regulators' sights handle things going forward, we'll have to stay tuned.