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April 23, 2014 - Latest:

Barclays Libor scandal: The final straw?

  • 28 June 2012

To recap, Barclays has been fined $450m having been found guilty of manipulating Libor rates. The New Statesman gives this neat summary: "In 2005, traders in Barclays investment bank asked Barclays treasury function to report false Libor rates, in order to give their profits a boost. Barclays reversed this in 2007, and started deliberately understating their Libor rates, after they started to worry that high Libor rates were making it look risky in the wake of the run on Northern Rock."

It makes the hitherto Teflon-coated Bob Diamond's position look extremely precarious. The group has protestors at the gates and the Chancellor is set to raise the issue in parliament

Barclays' chief executive may now be ruefully casting his mind back to his comments to a Treasury Select Committee in 2011 : "If banks have bad management then they should be allowed to fail." He goes on to point out that strong regulation is needed to 'ensure that taxpayers never have to put money into the bank again.' There is no question that Barclays needs a bailout from the taxpayer at this point, but the taxpayer may have picked up the tab for its market manipulation.

The FSA has suggested that Barclays may not be an isolated case: "Tracey McDermott, director of enforcement at the FSA, which imposed fines alongside the US financial regulator, told the BBC: "We have a number of investigations that are ongoing."Obviously we need to look at each case on its own particular facts but the initial indications are that Barclays was not the only firm that was involved in this."

Other big names mentioned in connection with the investigation include Citigroup, JP Morgan, Deutsche Bank, HSBC and Royal Bank of Scotland.

This seems to support the argument that, in not letting weak banks fail in 2008, the UK is now saddled with banks that are not fit for purpose. The Darwinist survival mechanism of capitalism has not been allowed to work and we are left with an inadequate species as a result:  "A more subtle argument, often advanced here, is that by bailing out huge banks new financial institutions that may have a strategy that is more appropriate to a sustainable economy are crowded out, and find it harder to get established….

"The big snag with rescuing banks – and it is an argument that does not get aired sufficiently – is that capitalism is supposed to mirror how evolution works. Bad businesses are allowed to fail; bad practices lead to bankruptcy, and good businesses thrive. By bailing out banks we are effectively protecting a system that may no longer be appropriate for the modern economy."

A lot of commentators have also raised the moral question. Robert Peston, for example, says in his blog: "It's quite hard to think of behaviour by a bank as shocking as this: not telling the truth about what it is costing you to borrow, that then becomes a benchmark for pricing other deals." There are plenty in the online community who believe that bankers should be held to closer account on the behaviour. For example, Mr Awkward on the FT makes the reasonable suggestion that there needs to be a league table reflecting banks' disciplinary track record on a rolling five year basis: "Points would be awarded for sums paid in fines, settlement of regulatory action, level of sustained customer complaints, egregious losses due to poor controls and perhaps sums paid to tax authorities due to failure to comply with anti-avoidance codes."

Stephen Peak, fund manager at Henderson agree with this sentiment:

"We have yet another episode that demonstrates the disconnect between what most of us think is reasonable and decent behaviour and that which has taken place at the banks. When remuneration is added to the mix is not a surprise that we are entering another period of debate over the structure of and pay at banks. We think it inevitable that the pragmatic stance taken thus far will be stretched to breaking point and beyond – there will be more changes and regulation.

"The financials sector has proved to be very difficult to assess with the background of global and euro zone crises. These interbank rates' revelations begs the question "what next?" and make the task of assessing exposure for our clients more difficult, even impossible. Confidence in financial markets and the City was fragile, today it is unfortunately even more so."

This is all valid. But part of the problem in the UK is that the banks aren't currently seeking any money, so there is no sense that they can be 'cast loose'. They were a net contributor to UK tax revenues last year. The money has already been taken, and spent, and the UK Government is now in the process of trying to claw it back. The government is unlikely to try and dump all the bank shares that it owns on the market when sentiment towards the sector is still so bad and it costs it nothing to own them. That said, if the Barclays problem spreads to RBS or one of the other majority State-owned banks, the management team will need to have some good answers for its shareholders. Perhaps better than those Mr Diamond has given so far.

It is a different situation in Europe, of course and only time will tell if the Continental Europeans continue to feel inclined to support their ailing banks when they continue to behave with little regard for those who they are designed to serve.

 

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