Punish the bankers, not the banks
Another day, another banking scandal. Last week, it was a software glitch so serious that some people were left homeless and scrabbling around for money to pay the rent. This week, a new scandal over mis-selling of interest rate swaps has so far been buried under the furore over manipulation of LIBOR by Barclays (and apparently other banks). They could at least stagger the scandals a bit – say, one a month – we need time to absorb the last one before we start on the next.
The London Interbank Offered Rate is a hypothetical indicator of the cost of money, based on the answers given each day by a panel of banks to the question: how much would you have to pay to borrow in the interbank market today? It was introduced as part of the Big Bang deregulation of the City in order to provide a benchmark interest rate for pricing the new financial instruments being developed: swaps, options, futures and forwards.
Before long it was being used as a reference rate for all sorts of loans, including mortgages and credit card loans, not only in Britain but across the world, making it by far the most important index in global finance, one of the first numbers we look at in taking the pulse of the world economy, alongside the Dollar/Euro exchange rate and the yield on U.S. Treasury debt. In fact, it is estimated that LIBOR is the pricing fulcrum for instruments totalling a mind-boggling $350 trillion, or several times world GDP.
The cost of allowing LIBOR to be distorted is incalculable at this stage, but potentially huge, because it means that, when the rate was artificially high, millions of borrowers with loans tied to LIBOR were overcharged and conversely, when it was too low, depositors were short-changed. But don’t be surprised if ordinary folk get no recompense for their losses. By contrast, you can expect the heavy hitters in the money markets to demand compensation for their losses on derivative contracts priced off LIBOR, a process which will involve vast legal expenses and wrangles dragging on for years to come, especially in the American courts. Blessed are the lawyers, for they shall inherit the earth.
In anticipation of this gloomy outcome, the market knocked nearly £4 billion off the value of Barclays’ shares in today’s trading, a loss which dwarfs the £300 million fine imposed by the regulator. Much of this loss will be borne by Britain’s pension funds, which have every right to be livid. Indeed, if there is anything like a silver lining to this storm cloud, it is in the indications that the institutions who are supposed to manage our savings are at long last starting to challenge bank boards to justify the irresponsible behaviour and ridiculously generous paypackets of senior management. Implicitly, belatedly, the investing institutions – pension funds, insurance companies, hedge funds – may now be ready to face up to their responsibility for the repeated failures of corporate governance which made possible the pre-crisis bubble. Maybe the worm has finally turned.
We can also look forward to a second appearance by Bob Diamond before the Treasury Select Committee, where he will no doubt throw his subordinates to the wolves and plead total ignorance of any wrongdoing. It is amazing how bank CEO’s are able to point to the profits generated by their traders to justify their bonuses, yet disclaim responsibility as soon as it suits them.
There are two points to be made about all this. First, this scandal has dealt a body blow to the reputation of London as a financial centre which boasted of the integrity and transparency of its markets. On its own, it will not lead to a wholesale exodus from London, nor to the immediate replacement of LIBOR as benchmark by its American, NYIBOR, or by Euribor or HKIBOR, but London cannot afford these repeated scandals without progressively eroding its advantage over the competition.
Secondly, Bob Diamond might do well to count his blessings, because back home in the U.S., the authorities are often merciless with those who distort markets. Insider trading in the stock market, for example, often ends with the perpetrators carted off in handcuffs and facing long prison sentences, even though the sums of money involved are only a fraction of the amounts involved in the LIBOR scandal. In Britain, by contrast, the maximum penalty seems to be forced resignation and getting sent home to spend the rest of your life counting your money – and loss of your knighthood, if you’ve got one. If Bob Diamond’s unwillingness to step down is because he thinks the loss of a prospective knighthood is punishment enough, he may be wrong this time. People are just too angry, and the banks are running out of apologists willing to defend the indefensible. In this respect, the fine imposed on Barclays is an irrelevance.
It is time to stop punishing the banks and start punishing the bankers.
Image — A man walks past a branch of Barclays bank in central London, June 28, 2012. REUTERS/Paul Hackett