As the chairman of Barclays resigns in the wake of an interest-rate fixing scandal, the city of London is in crisis and Prime Minister David Cameron has announced an urgent Parliamentary inquiry.
“It’s a turning point,” said Martin Vander Weyer, a former director of the investment arm of the British bank, now known as Barclays Capital. “Three scandals have come in Britain in a perfect storm last week.” The NatWest online bank didn’t work for 10 days because of a software problem. Meanwhile, Barclays was caught mis-selling complex interest-rate insurance to small companies and, more important, a LIBOR scandal has emerged.
The London Interbank trading system, known as LIBOR, and its smaller counterpart, EURIBOR, between them set the benchmark for interest rates around the world. The self-regulated system relies on banks accurately reporting the costs of their own borrowing, but the Financial Service Authority and the U.K. Department of Justice fined Barclays a combined $450 million last week for fixing the rate from 2005 to 2009. The early misreporting was to the benefit of the company’s derivatives traders. During the credit crunch, when Lehman Brothers collapsed, Barclays systematically underreported its borrowing costs in order to appear healthier—and thus avoid the nationalization that overtook other British banks, such as Royal Bank of Scotland and Lloyds Halifax.
“It’s not a victimless crime,” Labour MP John Mann, a member of House of Commons Treasury select committee, told The Daily Beast. “If there’s fraud and misreporting, other people lose out: mortgage holders, other counterparties,” he said. “It’s like insider dealing”
Internal emails published by the Justice Department reveal a culture of greed and apparent insider trades, with one trader thanking another for rigging the rates: “Dude I owe you big time! Come over one day after work and I’m opening a bottle of Bollinger! Thanks for the libor.” The Serious Fraud Office in the U.K. is now investigating the case, with class-action lawsuits pending in the U.S.
Despite the resignation of chairman Marcus Agius, the CEO of Barclays, American-born Bob Diamond, remains in place. He wrote to his staff today to apologize to the thousands working in the retail branches for the misbehavior of the traders in the investment arm and to announce an internal investigation. However, Diamond is being described as “the most hated man in Britain” and is due to face the new parliamentary inquiry on Wednesday.
“Mr. Diamond should be sacked,” said Mann, “and LIBOR should be regulated rather than self-regulated.”
Vander Weyer, echoing Mann, said “Diamond’s era is finished,” though he also pointed out that Barclays was not alone in the LIBOR scandal. “False reporting was widespread, and like a version of game theory: because you assume others were doing it, you did it yourself.”
Getting rid of Diamond won’t be easy, as he has fashioned Barclays in his own image during his 16-year tenure in charge of the bank and there is no obvious replacement. “He’s the prime example of the greed culture, and the most high performing of all of them,” Vander Weyer said. “He was the highest paid and set the standard for his employees, saying ‘boys, you too can be as rich as me …’ The whole culture was based on the principle of being like Bob.”
In Parliament on Monday, the opposition Labour Party leader, Ed Miliband, called for a wider, judge-led public inquiry into the ethics, culture, and practices of the city, much like the ongoing Leveson Inquiry into the press, created after the phone-hacking scandal last summer. Both Mann and Vander Weyer agreed that regulation only solved part of the issue and that the whole corrupting bonus culture of the city needs to change.
The problem with the Parliamentary inquiry, however, is that politicians investigating bankers draws a “pots investigating the blackness of kettles” analogy. Nonetheless, a judge-led inquiry could be too cumbersome and slow. Mann said he thinks that more urgent contingency measures are needed to restore consumer confidence and stop the crisis from spreading. Eventually, he said, the market in “financial products should be clearly segmented, with the government only underwriting them in proportion to their ‘quantifiable risk.’”
In the meantime, for businesses, consumers, and politicians alike, a rocky road lies ahead this summer. The city of London is as big as Wall Street, but as a proportion of Britain’s GDP, financial services are even larger. Banks have been a major source of government revenues—and donations to the major political parties. More uncertainty could force a further credit squeeze on an economy that has just entered a double-dip recession.
Despite the lessons of the last four years, the banking sector in the U.K. is still too big to quail, let alone fail.