A right Royal banking fiddle

The taxpayer-owned UK bank, the Royal Bank of Scotland (RBS), has been fined £390m for its role in the illegal fixing of the interbank interest rate, Libor.  This is in addition to the fine being imposed by US regulators for the same offence.

As I explained in previous posts
(https://thenextrecession.wordpress.com/2013/02/01/the-never-ending-banking-story/), Libor sets the floor for many other borrowing rates that affect you and me, like mortgage rates, bank deposit rates and short-term corporate borrowing.  It is supposed to emerge from the process of the ‘free market’ in the demand and supply of loans.  But now we know that for years, the major international banks (up to 20 banks) rigged the market by fixing the rate by secret negotiation between traders, and especially within each bank.


So the Libor each day was more a product of football match fixing than due to the ‘free flow of market agents’.  As a result, the interest rates for borrowers across the world were distorted and lenders and borrowers alike were defrauded.

As Costas Lapavitsas and Alexis Stenfors put it in the FT (http://www.ft.com/cms/s/0/1054054a-7052-11e2-85d0-00144feab49a.html#axzz2K455wHkY):
“manipulation results in a wealth transfer across society in favour of banks. Equally serious is the impact on monetary policy. As long as Libor undershoots the actual money market rate, the central bank – where it uses Libor as a signal – is conducting policy on the wrong basis, with significant costs. It is reasonable to surmise, for instance, that central banks’ response to the 2008 liquidity crisis was too slow because the rates at which banks transacted were by 2007 probably substantially higher than Libor.”

Originally, the scandal came out from the activities of another UK bank, Barclays, which eventually led to sacking of its ‘dynamic’ chief executive, Bob Diamond and for which it was fined $450m.  But now the rigging activities of RBS appear to have been even worse.  And this is the shocking point – this Libor rigging went on under the ‘watchful’ eye of the current chief, Stephen Heston, appointed when the bank was nationalised by the UK government after it was brought to its knees by the previous management under the notorious Fred Goodwin.  It is now revealed that for two years after Heston got the job, the Libor traders in this publicly-owned bank carried on rigging the rate knowing it was illegal and the current management of the bank did nothing for a year and then took another year to dig out what was going on.

Stephen Hester says:“We condemn the behaviour of the individuals who sought to influence some LIBOR currency settings at our bank from 2006-10.”  But the regulator cites RBS for a breach in 2011: “RBS did not begin to put such systems and controls in place until March 2011 and its initial measures were inadequate because they did not address the risk that Derivatives Traders would make requests to Primary Submitters…”

The head of the trading department has been sacked, but needless to say, Heston, his senior management and most of these traders have got off without a single sacking, let alone a criminal charge or conviction.  Indeed, the government prefers to carry on with ‘business as usual’, in the hope that as soon as possible, the bank’s share price can get back to the level that the taxpayer paid for its shares, in order to re-privatise the bank.  Based on this policy, the government will allow these criminals to get off Royal scot-free!

Sure, £390m goes into the taxpayers’ purse in fines, maybe.  But that money comes out of the profits of RBS and thus out of the dividends due to the state.  So it is Peter to pay Paul.  It repeats the main lesson
(https://thenextrecession.wordpress.com/2012/11/19/marx-banking-firewalls-and-firefighters/).  The nationalisation of RBS and Lloyds Bank was carried through just to bail out the banks.  It was not to give control to the electorate.  The former Labour government and this coalition government continued with the policy of ‘arms-length’ control.  That means the banks were left to continue with their criminal activities and their executives were excused any wrongdoing.  Rather than use public control to provide a proper banking service to the economy, the banks are to be readied for their return to private ownership for profit.

As Lapavitsas and Stenfors say: “Libor-fixing is an institutionalised private meeting of banks that ends up serving their interests. The answer is public intervention in the rate-setting process, whether through the central bank or otherwise. That is the real policy solution.”   Unfortunately, nothing will change.


“Britain is very good at banking.  Recently there have been some ghastly mistakes – yes, we buggered up – but the percentage of bankers who have misbehaved is tiny. The City is moving towards a healthier capitalism… We’re now prepared to criticise ourselves and are becoming more open about the fallacies in our system… We need a more moral approach to capitalism. A healthier capitalism – not tighter regulation, which hinders banks’ ability to lend and support society in the way it is meant to. A strict legal approach – essentially box-ticking – is not the best way to regulate a bank. We need to find a commonsense approach, a way of introducing the moral over the legal.”  Roger Gifford, Lord Mayor of the City of London, FT 1 February 2013.

“Banker bashing is a bad thing – if you wake up every morning to be lambasted in the headlines, it is less likely that you will want to work in the field and that reaction will hurt the economy.   The UK must stop attacking the industry if it wants to remain a good place for global finance”  , Bill Winters, ex-head of JP Morgan investment banking, 6 February 2013, City AM

3 thoughts on “A right Royal banking fiddle

  1. Michael, you suggested in a previous post that we should spend 50 odd billion on fully nationalising the banks. Wouldn’t it be better to continue guaranteeing those with smallish sums of savings on deposit at our existing banks; spend the 50 billion (or more) capitalising a shiny new national bank; and letting the failed dodgy banks go down? Could we be buying lemon banks that could, down the road, cause us untold grief if they go belly-up? The Brown/Darling decision to partly nationalise some of the big banks, for which they are highly praised, scares me. Is the whole nation on the hook for colossal sums of failed bank debts?

    1. Warren

      We can do both – namely guarantee deposits; and if necessary liquidate certain failed banks, while taking over others. As you say, the issue is that taxpayers should not pay in order that existing shareholders or bondholders are fully recompensed for their risk-taking. Compensation for losses would have to be looked at on its merits. The $50 odd billion was just an example to show that even full compensation at current market prices was not huge compared to the hundreds of billions already expended..

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: