As has been widely reported in the media Barclay’s has been fined £290 million for trying to rig the LIBOR (the London inter-bank lending rate which sets the ‘benchmark’ for £360 trillion in mortgages, credit cards, and other contracts worldwide) and its European equivalent. However, of this £290 million, the FSA in Britain fined Barclay’s just £59.5 million for “misconduct” which was “serious, widespread and extended over a number of years”. Their interest rate submissions were “tools to promote their own interests”. Barclay’s behaviour, said the FSA, “threatened the integrity of the rates with risk of serious harm to other market participants”. However, the naughty boys actually got a “30% discount under the FSA’s settlement scheme”, otherwise the fine would have been £85 million. Why you may wonder would those carrying out serious misconduct get a “discount”. The young lad involved in the London riots who got a six month sentence for stealing a £3.50 pack of water must certainly be wondering why these gentlemen aren’t behind bars. Yet the the Bank of England, with masterly understatement, calls their misconduct “impropriety”.
It’s arguable but the chances are that but for the intervention of the US Commodities Futures & Trading Commission (CFTC) the lilly livered British ‘regulator’ would not have taken the action it has. The CFTC started investigation in May 2008. It was contacted by a whistle-blower. By spring 2010 it had given the UK Financial Services Authority ample evidence of attempted manipulation. The investigation has pulled in nearly a dozen investigators and more than 20 banks on three continents. Barclay’s fine last week was the first of probably many ‘settlements’.
The Financial Times yesterday quotes a CFTC commissioner, Bart Chilton as saying:
“Regulators all too often just assumed that market participants would do what was expected. In 2008 we all got a slap in the face wake-up call that told us we had to change, and we did.”
How much they have changed is questionable but it’s probably true to say that if it had been left to the British ‘regulators’ the slap on the wrist would have been even more limp than it was. After all, the only ‘punitive’ measure thus far against the might of Britain’s financial institutions responsible for the mess was the stripping of Sir Fred Goodwin of his knighthood.
In relation to the way that LIBOR is set, the Times quotes “a senior regulator” as saying that “Everybody knows it was not a proper reflection of banks borrowing costs.” Yet they all turned a blind eye. The Bank of England was aghast at the very suggestion that it had known what was going on.
In the document associated with Barclay’s ‘settlement’ with the CFTC a bank manager is quoted as having said to a FSA official in 2008 that: “To the extent that the Libor rates have been underestimated, are we guilty of being part of the pack? You could say we are…I would sort of express it maybe as not clean clean, but clean in principle.”
That roughly translates as, sorry guv, we had to do it because the rest of them were, otherwise we wouldn’t have done it!
It seems extraordinary that the Chancellor of the Exchequer can say that manipulation of LIBOR rates is not a “crime”, but to most other people it looks like fraud, as even the ex-Metropolitan police commissioner Blair has said.
Barclay’s activity was, in the words of the CFTC “to protect (its) reputation from negative market and media perceptions concerning Barclay’s financial condition”. This, of course, included the period when Barclay’s was trying to save itself from the fate of other banks, being taken over by the state. We’re OK they said. There’s no problem here.
However, the BBC’s Paul Mason points out that Barclay’s managed to get capital from Abu Dhabi and Qatar, to the tune of £8 billion rather than take state aid. They were merely trying to hide the fact that they were in trouble. In September 2009 they moved £7 billion of ‘toxic debt’ off of their books into a vehicle called Protium, registered – where else? – in the Cayman Islands. According to Mason it was staffed by Barclay’s traders and 96.5% financed with a ‘loan’ from Barclay’s. In other words they were hiding some of their potentially disastrous liabilities from ‘toxic debt’ by moving them off balance sheet a la Enron.
Bob Diamond, of course, was at the head of Barclay’s investment arm leading the charge to make big bucks rather than the meagre returns from retail banking . He was given the reward of top job at Barclay’s for what Mason describes as “taking the bank to the precipice and then forcing a large chunk to be sold off to the Gulf monarchies”.
It appears that the government wants to limit the proposed Parliamentary inquiry to the LIBOR issue. Paul Mason suggests that “what is at stake is the implicit deal the British political establishment has done – and redone – with the banks since 2008.” The ‘deal’ has really been to limit the action taken against these institutions and the senior figures who have systematically enriched themselves at the expense of the general populace.
Whilst Labour is calling for an enquiry led by a Judge it has yet to carry out a thorough self-criticism of its own infatuation with big business, its ‘neo-liberal’ economics and promotion of ‘light touch regulation’. Osborne is happy to point the finger at New Labour, but he conveniently ignore the responsibility of the Thatcher government for creating the conditions which precipitated the global crisis. The road to here started with Thatcher’s ‘Big Bang’ which led ‘staid’ and ‘conservative’ British retail banks to take over investment banks and start slugging it out in the new global financial market place. The obvious thing to do is to separate retail and investment banking. If these crooks want to speculate with their own money, or those of voluntary investors, let them. But they should not be able to speculate with our money by way of special instruments in which mortgages and such have been ‘securitised’.
The coalition government has refused to reinstate the separation of retail and investment banks and there is much doubt in many quarters as to the efficacy of the proposed ‘firewalls’ within banks between retail and investment arms. All the ‘outrage’ of Osborne and Cameron is mere hot air. They are not going to seriously attack the very people and institutions who support them financially and politically.
Competition, we are told, improves efficiency. In the case of of the process begun by ‘Big Bang’ it created not efficiency but waste, and the spiralling out of control of the globalised financial markets. Instead of finance serving the economy, the economy was serving finance, with dire consequences. One example was the fad for massive Private Equity deals which at the height of the mania involved take-overs based on massive levels of debt. They even did it with football clubs like Manchester United.
Robert Peston has furnished us with another small scale example, though none the less telling, of how finance has become parasitic on the real economy. He sites the example of Adcocks and Sons, a small retailer in Norfolk. The company had banked with Barclay’s since 1912. Mr Adcock made the mistake of thinking he was still dealing with the old Bank. In early 2007 he was persuaded to enter into a complicated derivatives transaction, an “asymmetric cap and collar”, none the less, with Barclay’s investment arm, Barclay’s Capital. This was a version of an “interest rate swap”. It was in effect a bet that the Bank of England’s official interest rate would not fall below 4.7%. However, if it did then the interest rate of the client gradually rises to a maximum of 6.25% – plus a ‘margin’ (a tidy little earners for Barclay’s Capital) of 2.5%.
So ever since 6 November 2008 when the Bank rate fell to 3%, this company has been paying 9% interest on a commercial mortgage of £900,000, or just under £80,000 a year. A tearful Mr Adcock told Peston he didn’t know how much longer he could survive under the interest burden.
You might say this man was stupid. If he hadn’t taken out this derivative he would be paying an interest rate of 3.25%. Yet clearly the Bank was chasing him rather than vice versa. He says he did not appreciate what he was agreeing to. He thought he was getting protection against the Bank Rate rising above 6.75%. He trusted them.
Peston says that other Banks have done the same thing. He has been contacted by clients of HSBC, RBS and Lloyd’s. The FSA has recently found that 28,000 of these products were sold to small businesses since 2001. It has found instances of where the Banks have failed to explain the risks the customers have been taking on, or did not properly disclose the costs of cancelling, or ‘forced customers into naked speculation on the direction of interest rates’.
This activity is really a microcosm of the transformation of banking which followed the ‘Big Bang’ which produced a frenzied rush to create ‘instruments’ which would offer higher profits than more traditional banking activity.
As for Mr Adcock he took his case to the Financial Ombudsman but failed because he has just half an employee over the 10 employee threshold for the Ombudsman to have jurisdiction.