” The principal message is simple: Barclays’ actions did not meet the high standards that we set for ourselves.” Bob Diamond
“A bank’s culture is how people behave when no-one is watching.” Bob Diamond
In 1996, Brooksley Born, as head of the US Commodities Futures Trading Commission, met Alan Greenspan, the US Federal Reserve Chairman. He told Born that he didn’t think regulators should even pay any attention to fraud and or that it was something that needed to be enforced or was something that regulators should worry about. He said to Born: “you probably will always believe there should be laws against fraud; I don’t think there is any need for a law against fraud. The market would take care of itself.”
Bob Diamond is chief executive officer of the giant UK bank, Barclays. This American executive is paid more than any other banker in the UK. He claims he deserves it because supposedly he is very, very smart – one of the masters of the universe. He has consistently campaigned against more bank regulation, arguing that the time for apologies over bank behaviour during the financial crisis should end and banks should be allowed to get on with ‘business as usual’ (see my post, No remorse, 14 January 2011).
Now Barclays has been fined £290m ($451m), the largest penalty ever imposed by regulators in both the US and UK after admitting it submitted false London and euro interbank offered rates. Between 2005 and 2008, Barclays staff submitted fake estimates of their own interbank lending rates which would benefit their trading positions in order to produce a profit for the bank. And between 2007 and 2009, during the height of the banking crisis, staff put in artificially low figures to avoid the suspicion that Barclays was under financial stress and thus having to borrow at noticeably higher rates than its competitors.
What does this mean? Well, imagine you are a company wanted to borrow some money from a bank and they wanted to look at your books to see how risky that loan might be. If your books were not that great, the bank may want to charge you a higher rate to cover the risk. But what if you got a load of your customers to say they were paying more for what you sold them and you got your suppliers to say they charged less. Your books would look a lot better and you would be able to borrow more and at lower rates and so boost your profit. In effect, Barclays traders engaged in this trick in league with other banks to get the cost of their borrowing down. The average rate of interest between the banks (LIBOR) was not real.
The head of the US derivatives association, CFTC, commented: “Banks that contribute information to those benchmarks must do so honestly. When a bank acts in its own self-interest by attempting to manipulate these rates for profit, or by submitting false reports that result from senior management orders to lower submissions to guard the bank’s reputation, the integrity of benchmark interest rates is undermined.” In other words, Barclays lied and were dishonest in their dealings.
That it was deliberate lying is revealed in an email sent by a client of Barclays who wrote “following on from my conversation with you I will reluctantly, gradually and artificially get my libors in line with the rest of the contributors as requested. But I disagree with this approach as you are well aware. I will be contributing rates which are nowhere near the clearing rates for unsecured cash and therefore will not be posting honest prices.’’
Of course, when the bank itself lent money to ordinary people and small companies, the artificially low rate they had borrowed money at was not used, but the official LIBOR rate, thus making extra profits. “People taking out small business loans, student loans and mortgages, as well as big companies involved in complex transactions, all rely on the honesty of benchmark rates like Libor,” said Gary Gensler, CFTC chairman. “Banks must not attempt to influence Libor or other indices based upon concerns about their reputation or the profitability of their trading positions.” No kidding! In other words, there should not be a rigged market, but there was.
Derivatives traders at Barclays requested the false submissions as they were “motivated by profit and sought to benefit Barclays’ trading positions,” the UK bank regulator, the Financial Services Authority said. Again, no kidding! Former City minister Lord Myners and friend to the banks over ‘light touch’ regulation called this “the most corrosive failure of moral behaviour I have seen in a major UK financial institution in my career. I think fines and public criticism will not stop these behaviours. These behaviours will not stop until the people perpetrating it or responsible for overseeing them face the prospect of criminal charges and the prospect of going to jail.” Will that do the trick? Not when during the whole financial crisis of 2008-9 and subsequently, not one senior banker was prosecuted, let alone convicted in the UK, and the only ones in the US that were had been engaged in outright fraud, like Madoff.
And senior bankers were involved. Barclays admitted that “a member of senior management” instructed its Libor staff to lower their submissions to make them match other banks and dispel concern about the lender’s health. Senior Barclays managers were telling staff to submit artificially low rates to Libor from August 2007 until early 2009 to boost the bank’s financial condition, according to the CFTC. And it is not just Barclays. Citigroup, (tax payer-owned) Royal Bank of Scotland, UBS ICAP, (tax-payer owned) Lloyds Banking and Deutsche Bank are among those being probed by regulators worldwide. Barclays is the just first shoe to drop in a sprawling probe that now spans nearly a dozen regulators and more than 20 banks.
And what about the regulators? The Bank of England is supposed to monitor the activities of the UK’s banks. The other UK regulator, the FSA, said the scandal was the result of a “misunderstanding” down the chain of command whereby lower-level Barclays staff believed they were submitting a lower Libor rate at the Bank of England’s request, which was not the case. What? What codswallop! Paul Tucker is deputy governor of the Bank of England and now favourite to succeed the current governor, Mervyn King. He was in charge of monitoring Barclays on just this issue. So we had either incompetence, negligence, or collusion by the regulators. Either way, what does it say about regulation of the banks?
It also shows that nothing has changed. The giant banks with their grotesquely overpaid senior executives and traders continue to engage in gambling in financial markets. And given the weakness of the ‘real economy’ at present, gambling is the only way to make money, not providing a service for households and small businesses. They continue to pay high rates for loans if they can even get one. UK bank lending is stagnant.
Instead, the banks go on gambling and cheating. It’s a culture that seeps through the system as emails from the traders involved in this scandal reveal. “I’m like, dude, you’re killing us,” he said. His manager replied, “just tell him to… put it low”. “For you…anything,” said one. “Done… for you big boy,” said another. And: “I owe you big time… I’m opening a bottle of Bollinger.” In February 2007, one of the Barclays traders wrote in an instant message to a trader at another bank: “If you know how to keep a secret I’ll bring you in on it, we’re going to push the cash downwards, if you breathe a word of this I’m not telling you anything else, I know my treasury’s firepower… which will push the cash downwards, please keep it to yourself otherwise it won’t work.”
Barclays decided to own up to the regulators and got a 30% cut in their fine. And Diamond and other top executives are also foregoing bonuses this year. They had already agreed to cut their deferred bonuses after Barclays investors opposed the size of their pay. But no worries, Barclays shares rose after the news! Why? Because “the fine will be seen as a one-off and getting a piece of uncertainty out of the way,” said Simon Willis, an analyst at Daniel Stewart Securities. Exactly, let’s get back to business as usual.
So this is a scandal that even outdoes the JP Morgan $2-5bn loss recently recorded from gambling on derivatives markets (see PS below). If the fine is $450m at a 30% discount, just imagine the size of the trading involved and the profits made – it runs into billions. It just reinforces, if it needs to be at all, that banks should not be involved in using customers (and in some cases taxpayers) money to gamble in financial markets. The job of banks is to provide a public service: to hold deposits for everybody, to conduct transactions on their behalf and to provide credit for purchases of things that cannot be done from existing cash flows. In a monetary economy, this is as necessary as a health service.
Instead, the modern financial sector is just a huge casino for expensively educated crooks dressed in smart suits, driving high-powered vehicles and claiming grotesque ‘compensation’ for their gambling. Last year Diamond got as much as £6.3m in salary, bonuses and stock awards for 2011, as well as a £5.75m contribution toward his personal tax bill – talk about tax avoidance! And yet Barclays’ return on equity had dropped from 7.2% to 5.8% and the bank’s share price had fallen by almost a third and underperformed the wider banking index.
The case is overwhelming for public ownership of the banks under democratic control, with books and salaries monitored by the workforce and elected officials. See my many previous posts on this subject (Saving the banks, 15 September 2011 and Banking as a public service, 15 September 2010).
We don’t need a Diamond service but a public one.
PS A comment from an expert: “If 5bp of LIBOR mis-pricing could be shown over the four years that the LIBOR investigations covered, 5bp x £1 trillion of notional contracts x 4 years = £2bn in potential damages. If these were covered by the US Sherman or RICO Acts, the damages could be trebled.”
“Losses on JPMorgan Chase’s bungled trade could total as much as $9 billion, far exceeding earlier public estimates, according to people who have been briefed on the situation.”
Barclays shares fell 16% today on the realisation that losses and damages could be heavy.
“Systemic failure at the heart of the financial system” says UK Tory Chancellor Osborne. “the only motive was greed”