Uncharted Territory

July 18, 2012

Battling for Mount LIBOR, the Moral High Ground

Filed under: Barclays, Business practices, Credit crisis, Economics, FT, LIBOR, Media, Politics, Regulation, UK — Tim Joslin @ 4:17 pm

If you’re going to watch one film about the Vietnam War then I recommend Hamburger Hill. The point of the film for me at least (other discussions of the movie fail to stress this point) was that the battle was not about the strategic value of the eponymous high ground. Rather, both sides were trying to demonstrate their determination.

Catching up with an episode of Mock the Week last evening, I chanced on a rant by the one I would refer to as the tall, skinny panelist with dark curly hair, had the internet not been invented purely to allow me to remind myself that his name is, in fact, Chris Addison. The comic – who I always feel differs from his generally less hirsute colleagues in looking less like a funny-man, and more like a particularly tedious sociology lecturer – observed at some length that everyone is furious about the Libor “scandal”, even though most of them they don’t have a clue what it’s about. Well observed, in my opinion.

My first post on the Libor topic attempted to convey this moral dimension – and the battle for authority – with its title, Saint Mervyn: King by Name, King by Nature, but perhaps I wandered slightly off the theme, in favour of providing a narrative.

It seems clear after Mervyn King’s appearance before the Treasury Select Committee yesterday, though, that the Governor chose the Libor issue as the ground on which to continue a war with the City, and in particular with Bob Diamond. We’re told that Diamond’s sacking was not just about the Libor issue, but about Barclays’ “culture”, and a “pattern of behaviour”, as discussed in correspondence between Lord Turner, head of the FSA and Marcus Agius, Barclays’ Chairman. It seems clear that nothing new had emerged to implicate Bob Diamond personally and that King therefore simply seized the opportunity to get rid of him. Here’s how the Guardian puts it in an editorial:

“And why exactly was Mr Diamond pushed out? Not for any direct involvement in the Libor scandal but, in the words of Mr King yesterday: ‘They [the bank] have been sailing too close to the wind across a wide number of areas.’ No actual infraction; just a general sense of having gone too far for too long. … The impression left is of rather rough justice.”

Indeed, I’m reminded, the Libor scandal itself is nothing new. Although I now seem to have run out of free views of FT.com pages (so pushed the boat out and bought a copy this morning – £2.50, they’re having a laugh!), I did manage to access an old story that I’d bookmarked:

Banks served subpoenas in Libor case

By Brooke Masters and Patrick Jenkins in London and Justin Baer in New York

Regulators probing alleged manipulation of a key interbank lending rate have focused their demands for information and interviews on five global banks, according to people familiar with the investigation.

UBS, Bank of America, Citigroup and Barclays have received subpoenas from US regulators probing the setting of the London interbank offered rate, or Libor, for US dollars between 2006 and 2008. …”

Who says bookmarking thousands of interesting news stories is a waste of time, eh?

And this one FT story contained links to pieces in the FT’s Lex and Lombard columns, as well as another story the previous day:

“Big banks investigated over Libor

By Brooke Masters and Patrick Jenkins in London and Justin Baer in New York

Regulators in the US, Japan and UK are investigating whether some of the biggest banks conspired to ‘manipulate’ the benchmark interest rate used to calculate the cost of billions of dollars of debt.

The investigation centres on the panel of 16 banks that help the British Bankers’ Association set the London interbank offered rate, or Libor – the estimated cost of borrowing for banks between each other.

In particular, the investigation was looking at how Libor was set for US dollars during 2006 to 2008, immediately before and during the financial crisis, people familiar with the probes said.

The probe came to light on Tuesday when the Swiss bank UBS disclosed in its annual report that it had received subpoenas from three US agencies and an information demand from the Japanese Financial Supervisory Agency. …”

When were these stories published? 15th and 16th March, 2011.

Now, I may not be willing to fork out for an FT subscription, but I’m sure Bob Diamond and Mervyn King are. In fact, they probably receive the “Pink’un” as a perk of their jobs.

Regular readers will know that I’m very guarded in anything resembling an accusation that I may occasionally make on here, but it does indeed beggar belief that everyone involved is claiming to have been unaware of the brewing Libor scandal – a matter relevant to banks’ annual company reports – until the last few weeks, since even I knew about it, and the Libor-setting process was, until this month, of course, of somewhat peripheral interest to me, and even that overstates my curiosity. My £2.50 copy of the FT quotes Mervyn King on the front page as saying:

“The first I knew of any alleged wrongdoing was when the reports came out two weeks ago.”

Doesn’t the Governor read the FT? If not, why not?

To the extent I worried about it, I assumed the likelihood of fines over Libor-rigging was “in the price” of bank shares (we must be at the point where banks start assuming a few hundred mill in fines each year as part of their business plans, and therefore product-pricing). Active investors must have also thought bank share prices took account of the Libor investigation, as otherwise they would have sold the banks, short if necessary.

As I mentioned yesterday, Libor manipulation – much of which occurred during the financial crisis when the numbers were guesses anyway – would seem to be less serious than HSBC’s desultory attitude towards controls to prevent money-laundering. (Rather predictably, HSBC have seemingly gone overnight from one extreme to the other: I have recently had an HSBC account, to which I log in online 2 or 3 times a month, locked down – “suspended” so I can’t even pay into it – for no apparent reason).

No, Libor has been chosen as a battleground.

Sacking Bob Diamond makes no sense otherwise. Barclays report that they spent £100m “to ensure no stone has been left unturned” in their internal investigation and have settled early with the regulators. Since this has not been enough to keep the top guys in their jobs, perhaps their successors will adopt a different strategy next time!

And, like a misjudged military intervention, the battle threatens to turn into a war, consuming its instigators.

Mervyn King has clearly over-stepped his authority and threatened his legacy: “It is the BoE that finds itself most directly in the line of fire”, writes the FT’s Chris Giles. Not only are more and more awkward questions being asked in the UK, the regulators across the Pond are now playing holier than thou. That FT front-page lead (taking precedence over a report of the HSBC compliance chief quitting during a US Senate hearing!) is titled: “Bernanke calls Libor a ‘flawed’ benchmark”, and observes that “Mr Bernanke’s description of how the US reacted [earlier, in 2007] to claims that banks were understating the rates at which they could borrow contrasted with testimony yesterday from Sir Mervyn King.”

Mervyn King’s “pattern of behaviour” suggests to me that he may have been bullied at school. If not, I rather suspect he’s now going to find out what it’s like at his regular central-banker get-togethers.

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1 Comment »

  1. […] (previous instalments: Saint Mervyn: King by Name, King by Nature; Bashing Barclays Badly and Battling for Mount LIBOR, the Moral High Ground), for the world has in many respects come round to my way of […]

    Pingback by We Need Rules, not Rulers: Culture, Bankers and the Mervyn King Question « Uncharted Territory — July 19, 2012 @ 4:18 pm


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