IFR Editor-at-large Keith Mullin
SO THE LIBOR-FIXING scandal cost Barclays US$453m in fines to the UK FSA, the US CFTC and the US DoJ Fraud Section. The investigation has been rumbling on for a long time and it was only a matter of time before someone got whacked. Prosecutors have just got started: as the investigation reaches its climax, a whole bunch of anxious bank chiefs will be waiting for the call. And it’ll be coming soon.
If the Libor scandal wasn’t enough, UK banks are facing potentially similar ignominy and humiliation over the mis-selling of interest-rate swaps to SMEs. The FSA said it had found “a number of cases of bad practice, including possible mis-selling, meaning that customers may be entitled to redress”. Meaning that it’ll cost UK banks many millions – if not billions – in fines over the next few years. The payment protection insurance mis-selling disgrace has cost them around US$14bn so far in compensation. And now we get this? What a mess!
Bob Diamond said of the fines: “The events … relate to past actions which fell well short of the standards to which Barclays aspires in the conduct of its business.” He pointed out that the bank had taken prompt action to fix the problems and had co-operated extensively and pro-actively with the authorities – a bit like helping the police with their enquiries, then.
I’VE KNOWN BOB Diamond for many years and have always thought him to be an outstanding, upstanding individual operating with the highest levels of integrity. But I am sick of the tired and hackneyed CEO-speak, the lame, pathetic excuses, the feigned shock, the mock regret and the “this all happened in the past” nonsense. And no-one is impressed by super-rich individuals forgoing annual bonuses. It changes nothing.
“Nothing is more important to me than having a strong culture at Barclays,” Diamond said. Well, why didn’t you build one, Bob? Culture is an important element in any organisation. Articulating its characteristics is the easy bit; embedding its essential elements and pushing them down through the organisation requires time. It also demands integrity, rectitude and honesty right through the ranks. The CEO isn’t just tasked with coming up with the first bit; the job also involves attention to detail around execution and monitoring processes, strong management, empowerment of non-executive boards and high standards of corporate governance.
I am sick of the tired and hackneyed CEO-speak, the lame, pathetic excuses, the feigned shock, the mock regret
It’s far too easy to blame institutionally corrupt and fraudulent conduct on the actions of a few. I’ve long been and continue to be a huge supporter of the role that investment banks play in modern economies. But there is something very badly wrong at the core of the industry and I question whether senior management is up to the task of fixing it.
There’s been a huge amount of focus on the notion of “too big to fail”. The bigger issue for me is the notion of “too big to manage”. It’s certainly more difficult to convey as a concept and there are no tangible off-the-shelf tools to deal with it. Except forced break-up. Maybe it’s time …
OBVIOUSLY I DON’T know who knew what at Barclays or the other banks implicated in the investigation and I don’t for a second believe that Diamond or senior management would have approved directly of fixing Libor or Euribor submissions. But composite rate-setting has been a racket for many years. As a former fixed-income trader, Diamond knows how it works. Traders have long browbeaten submitters into manipulating rate submissions for self-serving purposes.
Predictably, the BBA said it was “shocked” by Thursday’s report about Libor. Not that it, for a second, excuses corruption by submitters, but the way the BBA sets Libor is a joke and the Association stands accused of collusion in rate-manipulation through its indefensible refusal to change its methodology or tighten up the question it asks banks: “At what rate could you borrow funds, were you to do so by asking for and then accepting inter-bank offers in a reasonable market size just prior to 11 am?” How a US$350trn financial products industry can rest on something so vague and manipulable is beyond me.
I wrote a blog back in April 2011 entitled:”Interbank rate-setting needs to move with the times”. I argued that the BBA and the European Banking Federation (which sets Euribor) urgently need to change their calculation methods. I argued then and I repeat it now: the only reliable metric is one based on actual transactions.
Banks should be required to submit a complete log of interbank trades – size, currency, rate and maturity – at exactly the same time covering deals of the past 24 hours. The calculation method doesn’t need to change. But what comes out of the process is a composite of real trades. If Libor/Euribor are to remain as global money market benchmarks, they have to be beyond manipulation.
Back to Bob Diamond: as the CEO of a bank that’s been heavily fined for rate-fixing – and excluding for now the fact that Barclays will get drawn into the widespread review being undertaken by the FSA into interest-rate swap mis-selling – it’s hard for me to see how in all conscience he can remain in his post. CEOs are rarely responsible as individuals for committing misdemeanours but sometimes they have to take the rap; it goes with the territory. Diamond has to go.
