US Person does not get a great deal of pleasure from saying, "I told you so", but I did and just a few posts ago. The "invisible hand" that rules capital markets, and thus the modern world, turns out not to be Ben Bernanke's, the Illuminate's, or God's, but Barclays' Bank of London and elsewhere. A developing scandal in the City is revealing that the London Interbank Offered Rate (LIBOR), a key interest rate reference mark used by banks and financial institutions to loan to each other, trade derivatives, and set currency rates, was being consciously manipulated to Barclays' advantage, and thus by implication all of the big banks too big to fail. Every major bank participates on panels setting the LIBOR rates for 10 significant currencies; Barclays' could not have manipulated the rates without the complicity of other banks. The scandal is a pubic rip-off of astronomical proportions, and just the latest example of casino capitalism which is destroying the well-being of billions. What is worse, if there can be a worse, is that British officials had knowledge of what was going on and did nothing to stop it.
Fortunately for mere mortals, Barclays' officials are cooperating with a parliamentary investigation now getting underway. The UK's Serious Fraud Office also opened an investigation. Barclays' CEO Bob Diamond and its chief operating officer have resigned, reportedly at the insistence of the Governor of the Bank of England, Sir Mervyn King.
There are two separate sets of allegations of wrong doing according to Forbes. First, and the more economically significant, is that Barclays' traders provided false information to the British Banking Association which is responsible for LIBOR to benefit their trading books from 2005 until 2009. The attempted manipulations were small--one or two basis points--but enough to create additional profit on high volume trading. Barclays' is the unfortunate first bank to be caught chiseling. Clearly an immoral and unethical practice that should be criminal and punishable by penal incarceration.
The second set of allegations is in the line of classic fraudulent inducement. In the depths of the Global Financial Panic of 2007, Barclays', among other banks, deliberately tried to influence LIBOR down to make themselves look less vulnerable to the bank crisis. Minutes from a meeting of the Bank of England's money market committee show, "several group members thought that LIBOR fixings had been lower than actual traded interbank rates through the period of stress." That innocuous sounding statement is heresy in the world of international finance. To suggest the LIBOR rates on which trillions of dollars of financial transactions including credit cards transactions are based was "fiddled" is a massive breach of public trust. Diamond admitted feeling "physically ill" when he discovered this month his traders fiddled the rate, but denies any personal culpability. His claim of not knowing about rate fixing until a month ago is contradicted by a senior executive whistleblower at Barclays'. In an interview with the Independent the banker said several people brought their concerns about fixing to their directors who were required by company rules to pass the information to their superiors, so Diamond should have known in 2008 about the fixing.
A year after this minutes were recorded Paul Tucker, deputy governor of the Bank of England, called Bob Diamond. Diamond's released note of the phone call says he asked Tucker to make sure banks were providing quotes representing real transactions in the market. Allegedly Tucker responded to the request, "Oh, that would be worse." Tucker also allegedly went on to say that he was receiving calls from unspecified "senior Whitehall officials" about Barclays' high rate submissions. Barclays' executives construed this communication to mean the government wanted lower LIBOR rates to stimulate business. Lack of liquidity was an extreme problem during the Panic and the condition contributed to the collapse of Royal Bank of Scotland. Despite RBS being propped up against bankruptcy by the B of E with secret emergency loans totaling £62billion it reported LIBOR figures showing it could borrow at rates less than Barclays' was paying, a ridiculous proposition.
The scandal has taken on political overtones. The Chancellor of the Exchequer, George Osborne claimed Ed Balls, the Labor shadow Chancellor knew about the rigging since he was a City minister during the Panic. Balls angrily denied the claim at the dispatch box on Thursday, calling the accusation "cheap and partisan".While the politicians on both sides of the Atlantic attempt to make political gains out of the scandal, the best result for the rest of us is a return to the regulations of Glass-Steagall in which banks invested with public trust and public guarantees are forbidden to engage in financial speculation. Because the "invisible hand" is stealing money right out of your pocket.