Barclays finds itself in a major scandal over interest rate rigging. When are regulators going to clean up Wall Street and the City of London?
Two titans of Barclay’s PLC–chairman Marcus Agius and CEO Bob Diamond– have resigned over their bank’s involvement in rigging a benchmark interest rate that underpins US$800 trillion worth of loans and derivatives.
Coming after the recent derivatives losses at JP Morgan Chase, the Barclays scandal explodes the myth that global finance has been reformed after the financial crash. And it raises another persistent question: why does it appear that financial executives involved in fraud never seem to get prosecuted?
Their departures follow a fine imposed on the bank of US$453 million after it admitted to the manipulation of the Libor or the London Interbank Offered Rate. Claims by Mr Diamond that senior regulators knew of the manipulation have also dragged in the Deputy Governor of the Bank of England, Paul Tucker.
Criminal penalties for financiers involved in this fraud will depend in part on the results of two inquiries launched by the Cameron Government, as well as an investigation by the Serious Fraud Office.
And Britain’s Chancellor, George Osborne, has now called for a new financial culture in the UK. “I hope it’s the first step towards a new culture of British banking,” Mr Osborne said.
Unlike standard crimes, financial malfeasances rarely lead to the jailing of key executives, no matter what the kerfuffle in the media or the investor community.
The email trails of traders, recorded by a bank’s IT system, are commonly there for all to see–need we recall the emails of Goldman Sachs trader “Fabulous Fab” Tourer–but for top executives the chain of evidence is often harder to establish.
In this case, however, Mr Diamond has kept a record of his conversation with Mr Tucker, which Barclays has released to the media; that has dramatically expanded the scandal to the Bank of England and will no doubt be a topic when former Barclays executives are quizzed by a parliamentary committee this week.
Mr Agius, the former chairman of Barclay’s, quit earlier this week but he was soon followed by the chief executive, the American-born Mr Diamond and his associate, Jerry del Missier. Mr del Missier apparently instructed Barclays traders to lower their estimates of borrowing costs after a conversation between Mr Diamond and the Bank of England’s Deputy Governor in 2008.
Married to the daughter of a Rothschild, the well dressed and equally well-heeled Mr Agius must have wondered, like the former head of BP did, what he had done to deserve this?
Barclays had fallen victim to a special investigation by UK, US and Asian authorities into about 20 banks, including the Royal Bank of Scotland, HSBC, the Royal Bank of Canada and, of course, Barclays.
The investigation focussed on their involvement in rigging the LIBOR, the interest rate banks charge when they borrow money from each other. More importantly, it is a benchmark rate used to set other rates loans around the world and an indicator the financial health of the bank.
It might not look like a major case of white collar crime, but it almost certainly is that. Banks manipulating the rate stand to benefit during difficult financial periods, when the markets are looking for signs that a bank could be in trouble.
The UK’s Financial Services Authority, which fined Barclays, concluded that the integrity of the LIBOR is of fundamental importance to both UK and international financial markets.
Mishaps and greed in the finance sector have damaged the lives of millions of people, yet the criminal justice system seems to treat offenders much as a gym manager would treat an overweight executive client with an unpaid gym bill.
This may change with stronger regulation–it did after the Great Depression–but it’s not something to expect anytime soon.
No matter what laws are passed, the structure of modern global finance is too powerful a beast to tame. Its values and sheer lobbying power are so formidable that the types of illegalities Barclay was caught out on will return, if in fact they went away at all.
Earlier this year, for instance, the Wall Street investment bank JP Morgan Chase revealed losses on derivatives bets worth an estimated US$3 billion; those bets now look like losing the bank US$9 billion.
These were the same types of sophisticated financial bets which were behind the crash in 2008. Yet the CEO of JP Morgan, Jamie Dimon, had spent the period after the crash decrying the unfairness of attacks on Wall Street and warning of the alarmist dangers of financial regulation.
It seems little has changed on Wall Street, or in the City of London.
Unlike Messrs Agius and Diamond, the CEO of JP Morgan Jamie Dimon still holds his job. But as Graydon Carter, the editor of Vanity Fair, pointed out in that magazine’s July issue: “The pedestal that [Dimon] so carefully constructed for himself is now vacant”.
After the dramatic events at Barclays this week, you can add another two empty pedestals to that list.
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