BANKER - ONCE AGAIN A BAD WORD; THIS TIME IN LONDON
By Ruma Dubey
On 1st July, Bob Diamond, now ex-CEO of Barclays wrote a long memo to his employees saying, amongst many other things, “I am sorry because we let down the people whose trust we rely on—our customers and clients; our shareholders; our regulators; and the communities in which we live and work.”
He is sorry and has quit but has left behind a myriad of questions, once again bringing to fore the risks of such huge conglomerates. Post 2008, as such one is yet to gain faith in such huge financial companies and this once again brings back serious doubts.
We in India, not directly linked in any which way to Barclays are aware of the company; know that it is a financial conglomerate and like many other big institutions which melted in 2008, felt was infallible. Head quartered in London, it is the fifth largest bank in Europe, with $2.4 trillion in assets. Like Bank of America and JP Morgan Chase it is stated to be a universal bank, servicing small and big businesses as well as individual clients. But once again, like in 2008, essential risk management has been thrown into the dustbins in the eternal hunt for monthly profits. That was in America in 2008 and this is in UK in 2012 though the common thread – Barclays had hired the extremely professional American Bob Diamond to run Barclays. He made it what it is today but today stands accused of rigging interest rates.
So what exactly happened at Barclays? Once again like the huge derivatives manipulations, this was not easy which is also why it was not detected for so long. The manipulation of interest rates which is being talked about was to do with the Libor or London Interbank Rate. This is the interest rate at which banks lend money to each other for day-to-day transactions. As Libor is set by banks, it becomes the base rate for transactions all around the world, a rate used to set the price of mortgages, credit cards and savings rates. It is shocking to now know that this rate had no scientific formula as such – it was fixed purely on the basis of trust, the feeling that bankers will not cheat.
Libor is fixed every morning at 11:00am London time. A department of the British Bankers Association (BBA) averages the inter-bank interest rates being offered by its membership. These rates are by given highly reputable, high-volume banks which participate in the London wholesale money market. To get the average, the BBA, starts with the 19 rates, discards the five lowest and five highest rates, then determines the average of the remaining 9 rates. These rates are not controlled by England's central bank, or any other central bank. But it was largely assumed that no one manipulated the rates and that is where the fraud happened. It is unbelievable now that Libor was fixed purely on faith and that too in today’s world where every loophole is an opportunity to make money, morals and ethics are outdated values.
Barclays made full use of this faith and was submitting lower quotes for years. Barclay’s traders urged colleagues responsible for submitting Barclays’ Libor rates to try and influence final prices. This was done with complete impunity - over emails, instant messaging, chats, and sometimes even shouted across tables to ensure others knew the rate they were asking Barclays to fix. They felt they would never be caught so there was really nothing discreet; manipulating the Libor was business as usual.
Barclay’s derivatives traders got the bank to submit inaccurate rates between 2005 and 2008 so they could profit. The bank also submitted artificially low rates from September 2007 to May 2009 to ease fears it faced funding problems during the financial crisis.
The British Govt, regulators, politicians and all are now baying for blood and want to see punishment not mere penalties. Barclays has been fined more than 290 million pounds by UK and USA authorities. Paying off a penalty is letting the culprits off the hook very easily and it now looks like Bob Diamond will not go down alone – he will start take down more on his way down. He has already stated that he manipulated rates at the behest of the Bank of England and in the coming days, the whole pack of cards could come crashing down. It should. Catching a top notch like Diamond should help clean the system.
Having said all this, how does this affect people like you and me who have nothing to do with Barclays? It does not. But banks having deposits based on Libor are likely to have received much lower rates than what they would otherwise have earned. They may now want the banks to repay them and London could reel under class action suits. Every company around the world that has deposits or operates in Libor rates will be affected. It does not affect the man on the street in India directly but being globally linked, some rumbles will be felt. And yes, it will change the way Libor is fixed. Hopefully, it will be purely scientific, leaving little room for faith and trust. Gentlemen do not exist, neither in USA nor UK but definitely not in India any more.
Obviously, some ‘diamonds’ are not forever.