Barclays scandal prompts furious public backlash in Britain
Barclays CEO Robert Diamond resigned today. As investigations of lending rate manipulation continue a government official says a 'culture that had flourished in the age of irresponsibility' must end.
A scandal that has engulfed one of Britain’s biggest banks is expected to spread to more financial institutions, intensifying a furious public backlash against a banking culture charged with greed, incompetence – and now corruption.
The reputation of Barclays, Britain’s second-biggest bank by assets, was dragged through the dirt last week when it was fined a record $453 million by financial authorities in Britain and United States for attempting to manipulate the key London Interbank Offered Rate (LIBOR), which is a measure of lending rates between banks, and operates as a benchmark to price trillions of dollars in derivatives, mortgages, and bonds.
Barclays admitted that it had made "artificially low … submissions" – that is, lied, about the interest rate at which it was borrowing. Sometimes it lied about the rate to create the false impression that the bank was seen as a low-risk borrower by its peers, and at others it lied to manipulate the value of derivatives tied to LIBOR to generate short term trading profits.
Monday, Barclays’ chairman Marcus Agius resigned, saying “the buck stops with me.” That turned out to be untrue. Tuesday morning, Barclay's American chief executive, Robert Diamond, who had insisted he would hold onto his job while waiving his bonus, also quit.
Mr. Diamond, who ran Barclays’ investment banking arm when the rigging occurred, will be cross-questioned by a panel of parliamentarians on Wednesday about what exactly happened between 2004 and 2009 when the ruse was under way.
The government has launched a cross-party parliamentary inquiry into the scandal, with Tory Chancellor of the Exchequer George Osborne saying a “culture that had flourished in the age of irresponsibility” among bankers must come to an end. The opposition Labour party is calling for a wider-ranging independent investigation, much like the long-running Leveson inquiry, which is probing standards in the media following a scandal over journalists hacking into cellphone voicemails.
Whatever action the British government takes, more revelations are sure to follow. At least a dozen big banks are being investigated by global authorities – the UK’s Financial Services Authority (FSA) and, in the US, the Commodity Futures Trading Commission and the Department of Justice - over the rigging of the market.
Biggest disaster in recent times
The scandal is the latest hit for a banking system already heavily criticized for its role in the financial crisis. Since the banking crisis of 2008 – when institutions that had issued too many risky loans had to be bailed out to the tune of billions of dollars by taxpayers - banks have been routinely charged with incompetence.
This feeling runs particularly high in Britain at the moment. Last month, millions of customers of the Royal Bank of Scotland (RBS) were unable to access their accounts due to a technical problem. Evidence has also emerged showing the four big British banks – Barclays, RBS, Lloyds and HSBC – misled customers about financial products they sold.
But to charges of incompetence and putting profit ahead of customers' interests are now added more serious allegations of downright corruption. Last week, the chief of the Bank of England, Mervyn King, accused Barclays of “shoddy treatment of customers … [and] deceitful manipulation.”
“We had looked up to banks for so long as a flagship industry for the country,” says Laura Spence, professor of business ethics at Royal Holloway, University of London. “Now, they are just an embarrassment. It’s been such a relentless stream of dubious practices and this is the final nail in the coffin of the reputation of banks.”
Traders in the city of London are said to be joking that the acronym LIBOR actually stands for London’s International Band of Racketeers. A new verb to describe what happens when taxpayers involuntarily bail out the banks - “bankered” – is being bandied around. More than one observer over the past week has wondered what the conscientious Quaker founders of Barclays would make of today’s scandal, suggesting as it does a culture in which honesty and probity count for little.
Those who believe that bankers should not command the swollen salaries and bonuses that are common in the City of London at a time when Western economies are struggling and taxpayers are routinely bailing out the banks – in part due to bankers’ risk-taking – are now seething.
Observers have been quick to point out that Mr. Diamond was paid 17 million pounds last year, a period for which he described the bank’s financial results as unacceptable.
Professor Spence says that the way banks have responded to the financial crisis, by restricting loans to small businesses, “the people who are working so hard to stimulate the economy,” has made them even more unpopular.
It has not helped that the FSA appears to have let Barclays off lightly. In its press release, it cited no individual names and the fine is far below the bank's average annual net profit. Britain's Serious Fraud Office, a government agency, has said it will decide within a month whether to press criminal charges against any of the banks under investigation.
Changes are coming
The inquiry announced by the government on Wednesday, which will report by the end of the year, will influence a government reform of the banking sector that is already under way.
That is likely to prompt tougher regulation and the separation of retail and investment banking activities, the merging of which some experts see as being at the heart of the problem.
But because banks are at the heart of Britain’s economy, regulatory changes are likely to be slow. In the same week that the LIBOR scandal broke, the Bank of England suggested the government make it easier for banks to lend to invigorate a struggling economy.