Libor manipulation scandal is a disastrous own goal for City

Allister Heath
WHAT preposterous emails. What were these traders thinking? That they would get away with it? Barclays and the entire banking industry have been badly damaged by the Libor manipulation scandal – and this time it is entirely a crisis of their own making. This is not like some previous rounds of banker-bashing, where lenders were wrongly blamed for developments that were actually caused by central banks’ cheap money or regulators’ promotion of sub-prime. No – this latest fiasco is all too real and unprovoked. Barclays’ inability to ensure that some of its staff behaved appropriately was a major failing of its corporate controls. People knowingly broke the rules. Shame on them.

The Libor row will have many other consequences, none of them positive. Many will ask why there were no criminal prosecutions in this case, in addition to the regulatory settlement. Once again, many will believe there is one law for rich rule-breakers – and another law for poor criminals. This will help fuel the feeling that “we are not all in this together” and will trigger demands for retribution, such as higher taxes, which would be irrelevant to the problem at hand and damage the economy.

The view that all of the world’s economic problems came out of London – AIG’s trades, JP Morgan’s recent problems, now Libor – will continue to gain ground, propagated by buck-passing Americans. Needless to say, the real problems that actually caused the crisis – sub-prime lending, the Fed’s madness, huge East-West imbalances, intellectual errors, implicit government guarantees – were largely invented in America, and AIG and Lehman were US firms. In no way should the Libor scandal be downplayed but it wasn’t a contributor to the recession. But it is true the UK authorities have discredited themselves over Libor. It beggars belief that this sort of behaviour was tolerated – the setting of the interbank rates appeared to have been conducted under the sort of amateurish club-like rules that were the norm in the early 1980s. It is truly astonishing.

The fine will also be damaging to Bob Diamond. He wasn’t the firm’s boss when the scandal happened, though he was a top executive. He’s actually a superb CEO who has built up a strong investment banking business almost from scratch. But this scandal could yet engulf him, especially when he is hauled in front of the House of Commons Treasury select committee. It also remains to be seen what happens if the separate interest rate swap misselling allegations explode in the industry’s face.

The scandal will make it more difficult to have a sensible debate on levels of regulatory capital. This will mean the economy being further squeezed. It will also make it almost impossible for anybody to oppose the latest batch of ridiculous anti-bonus rules from Brussels, which aim to cap variable compensation at 100 per cent of base pay. Such a “reform” would be disastrous – banks would become far riskier and less able to survive recessions.

I have previously defended banks or bankers when they were unfairly attacked. I will do so again when warranted – but not today. This is a clear-cut case of an industry shooting itself in the foot. It is good that Barclays has apologised and that top execs won’t be taking bonuses. But some other banks have undoubtedly also misbehaved. When they too settle in return for massive fines, the industry will be hit by further reputational damage.

Too many people turned a blind eye to the wrongdoings of too many others. The City’s reputation as a trustworthy marketplace will take years to recover.
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