As if global bankers needed to do anything more to blacken their collective names, there is now metastasizing from London a scandal so far-reaching, so appalling that I will be surprised if it does not bring down one of the world’s oldest banks, Barclay’s (whose CEO, Bob Diamond, has already resigned in a pre-emptive attempt to amputate the damage), and severely damage the now-Opposition Labour Party.
We’re bankers, and you’re all our pigeons
It’s the biggest scandal of all because, if it’s as true as the early testimony suggests, it is nothing less than rate-fixing involving hundreds of trillions of dollars’ worth of financial instruments – all of them denominated in a crooked metric – whose honest functioning lay at the heart of international banking arrangements.
Your guarantee of crooked banking
The story first broke two and a half months ago, and as I posted in early May:
Most games are easier to play when you can manipulate the scoreboard – and while in social games that’s merely cheating, when it comes to financial markets, it’s both extremely damaging and criminal – and amazingly that appears to be just what has been happening for years and is only now coming to light, as reported in The Economist (April 14, 2012).
Court documents shed light on how LIBOR was allegedly manipulated
Treasury rates can be used as an index because they are constantly being set and reset by the markets, widely and deeply traded, and the push-and-pull of pricing assures them of being impossible to manipulate. That is not so, I recently learned, of the other globally recognized rate:
LIBOR (the London inter-bank offered rate) is a financial benchmark set every day. It is supposed to be constructed by collating banks’ own honest estimates of what it costs for them to borrow money. But regulators around the world suspect that LIBOR has been subject to manipulation.
Does that line seem ziggy to you? Euribor rate quotes
Given how hard it is for regulators to detect manipulation or collusion, and how easy collusion would be to establish and maintain, I have to believe the worst, and that the regulators are right, LIBOR has been fiddled with.
Little information has been publicly released by the regulators that are investigating. But Canadian and American legal documents seen by The Economist paint a picture of what is alleged. It is not pretty.
Worse that not pretty, it’s criminal.
That’s what it looks like from the inside
The suspicions have now been confirmed, and as reported in multiple media, the ramifications appear potentially endless. Start with the Economist (June 30, 2012):
When a trader asks a colleague to submit false information in order to boost his profits, the correct answer is not “done … for you big boy”. This response was one of a host of exchanges involving 14 Barclays traders that were revealed this week as part of a probe by Britain’s Financial Services Authority( FSA) and American agencies including the Commodities Futures Trading Commission (CFTC) and the Department of Justice (DoJ).
“Ensuring the integrity of the futures and options market”
Oh, really?
The sums entailed are gargantuan:
Set each day, LIBOR determines the prices of loans and derivatives contracts worth several multiples of global GDP. The flaw in the system is that banks can estimate their own LIBOR rates.
You must have been playing with the wrong ball
That means you lose the hole and the match
As we’ve seen hundreds of times since the global financial crisis, things that are supposed to be independent are usually captured by profit centers, and that clearly happened at Barclays.
Although these estimates are supposed to be calculated by a team that is ring-fenced from other parts of the bank, the probe shows that they were influenced at the behest of Barclays’ traders.
Asked to fudge the numbers by a competitor bank, Barclays acquiesced. The grateful reaction: “Dude. I owe you big time! Come over one day after work and I’m opening a bottle of Bollinger.”
Who knew manipulating rates would be so easy … and profitable?
As the Economist points out, such manipulations are worth much more than a bottle of pricey champagne:
The traders involved were those placing bets on interest-rate derivatives. These contracts are large enough—the total market was worth $554 trillion in 2011—that small price changes can mean big profits. Indeed, other messages revealed that for each basis point (0.01%) that LIBOR was moved, those involved could net “about a couple of million dollars”. Given this sort of payoff, one bottle of Bollinger seems a bit mean.
Being slapped with large fines is the least of it.
The bank received a £60m ($93m) fine from the FSA, the biggest ever doled out by the regulator (even after a 30% reduction because Barclays co-operated). This number still pales beside the penalties imposed by the CFTC and DoJ, which brought the total fine to £290m, around 10% of pre-tax profits in the bank’s most recent financial year.
The bigger risk is litigation from counterparties in all those derivatives contracts.
We’ll see you in court … and court … and court … and court
The FSA’s report includes a mine of information on exactly how and when LIBOR was being manipulated. Barclays is also likely to face new civil cases, including in Britain, as customers on the wrong side of LIBOR movements bring claims.
Finally, if one bank was fiddling LIBOR, how likely is it the others were completely clean?
At least 12 banks are involved in LIBOR investigations around the world: the Barclays fines may herald similar penalties for other lenders. More disturbing still, if banks did distort money markets then they affected anyone with a LIBOR-linked contract. That would open them up to claims stretching far beyond their own customers.
Daddy’s going to jail for a long time, isn’t he mommy?
We know for a fact that more banks are dirty, because as reported in the Telegraph (July 1, 2012):
An anonymous insider from one of Britain’s biggest lenders – aside from Barclays – explains how he and his colleagues helped manipulate the UK’s bank borrowing rate. Neither the insider nor the bank can be identified for legal reasons.
It was during a weekly economic briefing at the bank in early 2008 that I first heard the phrase. A sterling swaps trader told the assembled economists and managers that “Libor was dislocated with itself”. It sounded so nonsensical that, at first, it just confused everyone, and provoked a little laughter.
That’s not how it should work, is it?
What I was explaining was that the bank was manipulating Libor. Only I didn’t see it like that at the time. The discussion was so open the behaviour seemed above board. In no sense was this a clandestine gathering.
When people talk of a culture of corruption, there it is – where everyone inside an organization is so thoroughly steeped in the deception that it is no longer deception, it’s simply how we do things.
That’s how we roll around here, corrupt
As part of that, we had to explain the “dislocation of Libor from itself”. As the trader put it, everyone knew that we couldn’t borrow at Libor, you only needed to look at the price of our credit default swaps – effectively survival insurance for the bank – to see that.
What that meant was that even though Libor may have been, for example 2%, the real Libor rate the bank was paying was more like 5% or 6%. So in fact, we needed to be lending money at Libor plus 3% or 4% just to break even. That is what we were telling clients.
There it is – lying and recruiting clients into an ever larger lie.
Big lies can mean big wins
Nor is it likely that the lying stopped there. There is evidence of links between Barclays and the former Labour government that run deep. There are already calls for shadow chancellor Ed Balls to testify.
Barclay’s survival is at stake, because unlike a manufacturer, a bank’s assets are nearly all confidence-based. BP survived the Deepwater Horizon oil spill because, for all its liability, it owned hard assets.
Brand damage isn’t the end
On the other hand, Enron destroyed Arthur Andersen because even though it ultimately avoided conviction, once its reputation for probity was destroyed, clients and partners jumped ship. Dewey & Leboeuf evaporated like dry ice in the sun. Lehman Brothers went down in a blaze of liabilities and was bought on the cheap by Barclays:
[Former CEO Diamond’s] crowning achievement came in 2008 when Barclays acquired the U.S. investment banking division of Lehman Brothers, helping to propel the U.K. bank further onto the international stage.
Irony or poetic justice? To judge by this Wall Street Journal (July 3, 2012), it may well have been the latter:
Robert Diamond, former chief executive officer of Barclays.
Bob Diamond is one of the world’s most successful bankers. As chief executive of Barclays, one of the UK’s oldest banks, this brash American banker led with a bravado that attracted the ire of politicians.
Now a U.K. citizen, Mr. Diamond grew up in Concord, Massachusetts, as one of nine children. He remains an avid follower of the New England Patriots. He also supports the Boston Red Sox and Chelsea Football Club.
Wicked pissah teams
Two out of three isn’t bad.
That ain’t bad
Mr. Diamond is said to be one of the world’s wealthiest bankers. He was estimated to be worth £105 million by this year’s Sunday Times Rich List. He was awarded a total of £6.3 million for 2011 in salary and bonuses, according to the bank’s annual report.
His detractors will remember him as the “unacceptable face of banking,” as he was once described by former U.K. business secretary Peter Mandelson, because he earned a telephone number salary at a time of economic depression.
The acceptable face of Labour? Peter Mandelson
Prior to his time as chief executive he had been head of Barclays’s investment banking division, a unit he built into a global powerhouse, having joined Barclays from Credit Suisse First Boston in 1996.
Given the scandal – manipulation of a rate critical to investment banking – and Mr. Diamond’s background, this 2009 feature on him seems oddly prescient:
Doesn’t like to hear bad news, though. Will sometimes stand up and leave a meeting if the news is bad. Or will stop somebody midsentence — “Why are you telling me this?” So if you talk to Bob, you better tell him good news. Because Bob Diamond is a good-news guy.
It seemed like something to mention in an interview — the kind of softball question that gets someone to talk about himself. So I did. And I watched Bob Diamond’s face change as if I’d ambushed him with secret documents. His hands, which had been poised in his pinstriped lap, closed into fists. He got up and went to his computer, then sat down again with his arms crossed.
Bring me good news or don’t bother coming
He had his glasses on, and he peered at me over the lenses. By force a smile flickered on his face, then went away.
“Who wants to hear bad news?” he said.
I have no idea where this scandal will end. Nor, I suspect, does anybody else. But here’s a clue, from the anonymous trader at another bank.
Libor had dislocated with itself for a very good reason – to hide the true issues within the bank.
There it is. We were lying to keep the bank alive.
Just this once
Somewhere in this mess will be a most culpable bank. That bank will need to disappear, pour encourager les autres.