The Barclays interest rate-rigging scandal has given us a glimpse into the way the banks operate—and taken the anger against the champagne bankers to new levels.
The trader’s emails at the heart of the scandal are as painful as they are annoying. One goes “Dude, I owe you big time! Come over one day after work and I’m opening a bottle of Bollinger.”
The emails show that trillions of pounds worth of loans and mortgages were relying on Libor loan rates that were little more than their made-up numbers (see Q&A, on opposite page).
They reveal that the financial system is not just a casino, but one where the bankers have stacked the decks and put a magnet under the roulette wheel.
“This is the way you pull off deals like this chicken, don’t talk about it too much,” wrote one Barclays trader. “This is between you and me but really don’t tell ANYBODY.”
Now Barclays boss Bob Diamond has run out of friends—and he’s been forced out. He desperately wanted to hang on. After all, Diamond is the banker who said last year, “There was a period of remorse and apology for banks, and I think that period needs to be over.”
He declared that running a bank was about “trust and integrity”. And as the head of a bank that didn’t take a government bailout, he has led the bankers’ charge against even a tiny bit more regulation.
Diamond even defended the scandal. He said, “On the majority of days, no requests were made at all.
“Even when made, the requests were not always accepted by the submitter, and the attempted adjustments were, on average, small.” That translates into English as “We did nothing wrong.”
This is what the banks were allowed to get away with for years. David Cameron says responsibility goes “all the way to the top”. That should include the prime minister himself—because this isn’t a case of one bad bank that got off the leash.
The Barclays case has only come to light now because they settled with the regulator—and threw the other banks under the bus to do it.
At least 20 banks are thought to be under investigation, including RBS, Lloyds, HSBC, Citigroup and JP Morgan. More are bound to follow.
The bankers are all on the hook—and they know it. One senior Barclays manager warned the industry body the British Bankers Association that the rates were rigged.
“We’re clean, but we’re dirty-clean, rather than clean-clean,” he told them. The association’s rep replied, “No one’s clean-clean.”
How the scam worked
What does Libor represent?
The Libor rate is supposed to represent the amount it costs banks to borrow money from each other. Banks don’t just sit on the money that’s in their accounts. It is always being traded and invested.
When there are more withdrawals than expected in a given day it can leave a shortfall in their vaults—so they have to borrow to make up the difference.
How is it calculated?
Interest rates are talked about as if they are some strange natural force beyond human control. But there is always a human hand behind them.
In this case, the British Bankers’ Association (BBA) sets the Libor rate, based on the numbers that other bankers decide to give them.
So why does it matter?
More than £6.5 trillion worth of financial products, including loans and derivatives, are valued according to the Libor rate. It has more influence on mortgage interest rates than the Bank of England base rate.
Why did Barclays lie?
From 2005 to 2008 Barclays manipulated Libor to boost the profits of its traders. Then from 2007 to 2009, at the height of the banking crisis, it reported a lower rate to try and hide the financial difficulties it was in.
Did it affect the financial crash?
It’s when banks started to worry about whether they could trust each other enough to lend money that people started talking about a “credit crunch”. Rates like the Libor were very closely watched.
One anonymous former senior executive at Barclays has said the faked rate “gave an illusion of stability and was a key factor in masking the severity of the crisis”.
Tiresome inquiry against banker bashing
Plans for a parliamentary inquiry into the banks in an attempt to calm the scandal are under attack.
Labour may boycott it in favour of a full public inquiry. Though quite why MPs need to have an inquiry to look at the books of banks owned by the government is unclear.
Diamond was set to appear before MPs on the Treasury Committee on Wednesday. He will be questioned by Andrew Tyrie—the same Tory politician set to head up the inquiry.
Tyrie has previously given what the media would call a balanced view. “It is important that people like Bob Diamond understand the scale of public concern about what’s happened over the last few years,” he said.
“But it’s important that the public understand some of the points that he and others have been making.” More succinctly the MP who colleagues nickname Andrew Tiresome said, “banker bashing won’t solve anything”.
All the parties are nervous about looking too closely at the banks. Both this government and the previous Labour one were, as Lord Mandelson put it, “intensely relaxed about people getting filthy rich”.
Labour pushed Thatcher’s deregulation of the City even further. But in the run up to the 2008 crash the Tories were still demanding the lifting of restrictive legislation on bankers.
Despite the occasional words of outrage, the consensus is still that whatever the bankers do it is good for us. The reality is the opposite.
Who is piloting the Tory party?
Now-former Barclays boss Bob Diamond reportedly landed David Cameron’s chartered Virgin jet as it returned from Africa last year.
The tannoy told passengers that “Captain Bob Diamond” had performed an “exemplary landing”. Barclays and Virgin deny the claim—but admit that Diamond was in the cockpit.
Perhaps more importantly, Diamond had been mingling freely with ministers and officials on the private jet—and the champagne was flowing freely.
It has also emerged that cabinet office minister Francis Maude was on a Barclays advisory committee between 2005 and 2009. In the final year they paid him £9,000 for 15 hours’ work.
Meanwhile City broker ICAP, run by top Tory donor and former party treasurer Michael Spencer, is under investigation as part of the rate-rigging probe.
Tory deputy chairman Michael Fallon has been dragged into the scandal too. He is on the board of broker Tullett Prebon, which is being looked at as part the investigation.