Bob Diamond's performance in front of the Treasury Select Committee on Wednesday afternoon was less entertaining, less rumbustuous and less explosive than may had been predicting, but it was still a seminal moment for the future of Barclays and other leading UK banks.
Diamond insisted that the 14 Bollinger-fuelled traders who lied about Libor fixings in 2005-07 were acting purely on their own behalf, that their behavior was "reprehensible" and that there was "absolutely no excuse" for the way in which they had cajoled the bank's 'submitters' into falsifying the bank's Libor numbers. He insisted that he knew nothing of the activity until "the investigation came above the desk supervisor level". He reiterated that the systematic falsification of Libor could be pinned on a few rogue traders and had absolutely nothing to do with him and repeatedly sought to portray himself as whiter than white saying that he felt "physically ill" when he first became aware of it over the weekend of June 23-24.
"This does not represent the Barclays I know and I love and this does not represent the work of 144,000 people who work for Barclays... it was wrong."
"The behavior was wrong, it been eradicated, it's been dealt with."
Diamond, who acknowledged the scandal has "put a stain on the organization" has had a bit of rollercoaster few days. On June 27 the bank was plunged into a near unprecedented crisis after reaching a settlement with the US authorities (the CFTC and Department of Justice) and the UK's Financial Services Authority, having volunteered to cooperate with official inquiries (a form of plea bargain in exchange for criminal immunity at a corporate level). It has been fined $451 million, which is substantially lower than other banks which are still being investigated are expected to have to pay.
A Department of Justice press release stated:
“LIBOR and EURIBOR are critically important benchmark interest rates,” said assistant attorney General Breuer. "Because mortgages, student loans, financial derivatives, and other financial products rely on LIBOR and EURIBOR as reference rates, the manipulation of submissions used to calculate those rates can have significant negative effects on consumers and financial markets worldwide. For years, traders at Barclays encouraged the manipulation of LIBOR and EURIBOR submissions in order to benefit their financial positions; and, in the midst of the financial crisis, Barclays management directed that U.S. Dollar LIBOR submissions be artificially lowered. For this illegal conduct, Barclays is paying a significant price. To the bank’s credit, Barclays also took a significant step toward accepting responsibility for its conduct by being the first institution to provide extensive and meaningful cooperation to the government. Its efforts have substantially assisted the Criminal Division in our ongoing investigation of individuals and other financial institutions in this matter.”
As Edinburgh University's Professor Donald Mackenzie said in an excellent article in the London Review of Books on September 25, 2008, Libor matters. To tamper with it is a form of market abuse that could cheat hundreds of millions of counterparties to lower returns from their investments, and potentially also cause them to get a worse deal on their borrowings. Mackenzie said:"Libor anchors contracts amounting to some $300 trillion, the equivalent of $45,000 for every human being on the planet.
Writing in the Harvard Business Review blog network, Umair Haque said that to manipulate Libor, especially if it was done in an alleged cartel of 16 global banks, is to undermine everyone's confidence in the price of money and to potentially to taint all investment and borrowing. He wrote:
The most basic function of a financial system is to price money. If a financial system can't undertake that simple task effectively — if the price of money is fixed like a roulette wheel stuck on red — all else must necessarily fail: investment must become malinvestment, speculation must precede creation, "profit" must become divorced from benefit, and wealth is effectively transferred from poor to rich, in a form of quiet but lethally effective institutionalized theft.
Diamond had thought he would be able to tough it out and remain as Barclays' chief executive, especially after the bank's chairman Sir Marcus Agius fell on his sword at the weekend. However it wasn't to be. Reports suggest his resignation was insisted upon by Sir Mervyn King, the governor of the Bank of England and Lord Turner, the chairman of the FSA. What really angered them was the American's attempt on Monday to draw the Bank of England into the scandal, effectively blaming it for the bank's self-acknowledged policy of manipulating its Libor and other interbank fixings.
This may have been the last straw for King, whose eyebrows are said to have been raised heavenward following Diamond's ill-advised attempt to deflect at least some of the blame. Anyone who has read Walter Bagehot's Lombard Street will know what a raised eyebrow from the governor of the Bank of England actually means.
For all that, there is some truth in Diamond's claim that the "Old Lady" sanctioned or encouraged the misrepresentation of Libor numbers at the height of the banking crisis (see Diamond's contemporaneous account of a fateful conversation he had with the deputy governor of the Bank of England Paul Tucker, on October 29, 2008). However this came very late in the day, as the bulk of the wrongdoing occurred in January 2005 to mid 2008. In the Treasury committee hearing on July 4, Diamond acknowledged that Barclays first lowballed its Libor numbers with a view to enhancing perceptions of its financial health in 2007.
For Diamond, who some Barclays insiders believe has been too reluctant to take the blame for the interest rate rigging scandal, to seek to pass the buck to the Bank of England was clearly a step too far. The bank's in-and-out chairman Marcus Agius did not deny that Diamond had been forced out by King and FSA chairman Lord Turner in this interview [video interview at bottom of page] with Channel 4 News' Faisal Islam
Inevitably given the whirlwind of events, plots and subplots in the unfolding Libor drama over the past few days, the Libor rigging scandal has been leading the news bulletins and become a springboard for people who believe that root and branch reform is essential if the City of London is to remain a global financial center. The Labour leader Ed Miliband and the Daily Mail have joined forces to call for a full judge-led, Leveson style public inquiry into the banks while the coalition government favors a specific inquiry into Libor, and a more superficial parliamentary inquiry into the banking sector. In my view the latter is wholly inappropriate, as it is unlikely to lead to radical reform.Overall Diamond, a former trader himself, was much more measured than some commentators had been predicting and did not seek to throw much in the way of mud in the direction of the previous government or the Tripartite authorities. However he gave little reassurance about the strength of the "Chinese Walls" inside Barclays Capital. Questioned by Conservative MP Andrea Leadsom he said the bank would not stand in the way of attempts to send the people responsible for the malpractice to prison.
Further reading on Bob Diamond and Barclays:
- Libor probe tests regulators' faith in Chinese walls by Ian Fraser
- City analyst: Barclays approach to Diamond's pay is 'just laughable' by Ian Fraser
- Diamond's Damascene conversion on the road to Damascus fails to convince by Ian Fraser
Tags: Andrew Leadsom , Barclays , Bob Diamond , CFTC , David Cameron , Donald Mackenzie , Ed Miliband , Edinburgh University , Euribor , Financial Services Authority (FSA) , FSA , interbank funding , Libor , regulation , Sir Marcus Agius , Tibor , Treasury Select Committee , Umair Haque , US Department of Justice