The title of the leader in The Economist says it all: Banksters. Specifics of the manipulation of the London inter-bank offered rate (LIBOR) may be too technical for the general public, but the underlying scam is easily understood. One of Britain’s most prestigious banks has admitted to rigging a rate used as a benchmark for several trillion dollars of financial instruments – including credit cards, corporate bonds and mortgages. The US$450M penalty imposed on Barclays by British and American regulators sounds punitive, but it represents just a fortnight’s worth of Barclays’ annual profits, will be tax deductible and the ultimate loss will be borne by the bank’s shareholders.
Part of the Barclays scandal seems to have arisen from simple greed. In search of larger profits, traders got their bank to submit inaccurate estimates of their lending costs. It speaks volumes about modern banking culture that this scam went undetected, or was tolerated, in the heart of the world’s financial capital for several years. Even after the recent shocks to the global financial system, oversight bodies remain overworked and underfunded. British and American regulators sifted through mountains of data – investigations into 20 other banks are ongoing – before they could establish that rate-fixing had occurred. Barclays is in the news mainly because it agreed to co-operate. Evidence of collusion with other banks has not yet been acted upon. There remains a strong sense that other well-known banks will soon suffer comparable embarrassments.
The Economist notes that “If attempts to manipulate LIBOR were successful … this would be the biggest securities fraud in history, affecting investors and borrowers around the world.” That some of the manipulation appears to have been done in the wake of the 2008 financial crisis, possibly with the approval of British regulators, in order to maintain public confidence, complicates the story, but it hardly excuses the crime. In a three-hour grilling before British parliamentarians, Robert Diamond, former CEO of Barclays, made all the right noises. He described his bank’s behaviour as “reprehensible” and admitted that when he learned the details of the rate-fixing they made him feel “physically ill.” But a disinterested observer might be forgiven for feeling a sense of déjà vu, and for harbouring a mild suspicion that bankers have mastered the art of the strategic mea culpa.
Last month JPMorgan CEO Jamie Dimon appeared before the US Senate to discuss his bank’s spectacular $2billion trading loss at its Chief Investment Office. Dimon spoke of “errors, sloppiness and bad judgment” but he also warned the Senators about the complexities of modern finance. There is no longer a “a bright-line distinction between proprietary trading and hedging” – the sort of line that regulators might police in a more orderly financial system – said Dimon, but he would admit that his bank’s losses had resulted from a situation that “morphed into something I can’t justify.” The modest tone was a striking contrast to Dimon’s criticism of new US banking regulations in July 2010, or his remarks last September, when G7 economists voiced support for global rules (Basel III regulations) on bank capital. Dimon called the Basel rules “anti-American” and opined that the US should consider leaving the group of international regulators. But even with these cumbersome new regulations, Dimon’s bank miscalculated its trading risk, perhaps catastrophically. At the end of last month the New York Times reported that the bank’s losses could mount as high as $9 billion.
The Barclays scam may seem egregious, but it bears a striking resemblance to schemes outlined in United States of America v Carollo, Goldberg and Grimm, a trial that recently concluded at a courtroom in New York. Ten years in the making, the case involved a great deal of complex evidence that also reduced to another easily understood crime: banks colluding to manipulate interest rates on municipal bonds. In Rolling Stone magazine, Matt Taibbi observes that “Over the years, many in the public have become numb to news of financial corruption …but the bid-rigging scandal laid bare in USA v. Carollo is a totally different animal. This is the world’s biggest banks stealing money that would otherwise have gone toward textbooks and medicine and housing for ordinary Americans, and turning the cash into sports cars and bonuses for the already rich. It’s the equivalent of robbing a charity or a church fund to pay for lap dances.”
After every new scandal there are promises of stiff penalties and better regulation. But few bankers ever pay the full price for their crimes. The recent conviction and sentencing of Allen Stanford for his multi-billion dollar Ponzi scheme is one exception, but even here victims have little chance of recouping their investments. (Last week a US federal judge ruled that the Securities and Exchange Commission had failed to prove that an agency that insures US brokerage accounts was liable for Stanford’s losses.) The British and American governments may growl at each new scandal, but they never bite. Shortly before the British MPs inconvenienced Mr Diamond for a few hours, the Bank of England released 50 billion pounds of quantitative easing to British banks, the “bourne from which no cash returns” in the words of the Guardian columnist Polly Toynbee. This confusion of messages is typical. Until politicians can summon the courage to impose serious oversight on their financial institutions – in Britain, Europe and the US – without the usual fear that regulation will chase investors elsewhere, scandals like Barclays’ will persist in what is clearly, a corrupt and grossly under-regulated financial system.
