WE’VE been through “everything but pestilence”, said a weary Scots voice on radio yesterday morning, its owner talking about a 15½ rail journey from Birmingham to Glasgow through torrential rain and hail, floods and landslips. Even a fire on his train. But he could have been talking about what that morning’s Financial Times was calling the latest “firestorm” engulfing the banking industry.
For the best part of five years now, banks have been at the eye of the global credit crunch; the deep recession which followed, with all that has meant for average living standards; and the anaemic crawl back to anything that looks remotely like what we used to call normal times.
Some banks were consumed by the crisis. Look no further than Ireland or Iceland for some of the headstones. Others, including Scotland’s two oldest and largest, ended up on extended taxpayer-funded life support. However, at no point throughout that unfolding cataclysm have prominent bankers said “sorry” and sounded as if they really meant it.
The poor dears have certainly been bashed around a bit. But at no point did they show any sustained understanding that the changing culture of banking – away from prudent and predictable customer service towards ever-more-reckless self-interest – was being bought at a very heavy price. In a murky game of pass the parcel, much of that price was falling into the laps of governments and taxpayers.
Not only were too many banks too big to fail. Worse, bankers went on insisting they deserved much fatter rewards than the rest of us. On no better pretext than their unshakeable belief that money and its profitable management is, in our post-industrial age, what really makes the world go round.
In January 2011, appearing before MPs to defend his bank’s continued payment of multi-million-pound bonuses to key staff, Barclays’ new chief executive Bob Diamond said; “There was a period of remorse and apology for banks. I think that period needs to be over.”
Next week Diamond will be back in front of MPs. This time, having already bowed to the inevitable and turned down his 2012 bonus, Diamond is fighting for his own skin. The bank he leads has been shamed into confessing sustained manipulation of a key market benchmark, both by traders in pursuit of profits and by senior managers worried that, during the credit crunch, if they didn’t understate Barclays’ actual borrowing costs the bank would be seen to be suffering a liquidity crisis.
Libor – the London Interbank Offered Rate – is not a financial construct designed to trip readily off the tongue of the average bank customer. However, in the past 48 hours how it was cynically manipulated, even before the 2008 credit crunch struck, has even made its way onto the Sun’s front page.
Just as distressed supporters of the now-liquidated Rangers Football Club have discovered, the hard way, how processes like Company Voluntary Arrangements (CVAs) work, so anyone worried about their mortgage or their savings is having to learn fast about Libor and what unscrupulous bankers and traders can do to fiddle it.
Libor is set daily by the UK’s banking trade body, the BBA. Reflecting London’s role as a centre for global finance, it is set in a range of currencies and for a variety of borrowing periods. It is supposed to reflect the rates at which banks believe they can borrow from each other. That benchmark is then used to determine the rates banks charge customers for mortgages, corporate and personal loans and credit card balances. It directly affects everyday financial products worldwide worth a staggering $350 trillion.
So when regulators on both sides of the Atlantic started some years back investigating attempts by up to 20 banks to rig Libor, it must have been clear to all concerned that, if the allegations were substantiated, the fall-out would prove seismic.
There have been other banking debacles in the interim. The payment protection insurance mis-selling scandal affected millions of individual bank customers and resulted in big compensation payouts. The recent meltdown in Royal Bank of Scotland’s transaction processing systems has yet to be fully explained.
And since the Libor scandal broke, four UK banks, including Barclays, RBS and Bank of Scotland owner Lloyds, have agreed, after another Financial Services Authority investigation, to compensate thousands of small- and medium-sized businesses for selling them complex interest rate hedges which failed to deliver the protection promised.
But the Libor scandal could be the real game-changer. Barclays has owned up and is paying a total of £290m to US and UK regulators. Curiously the record £59.5m paid to our own FSA includes a 30 per cent discount for early settlement. The big unanswered question is how many other banks, said to include both RBS and Lloyds, will also have had to confess to rigging Libor over many years.
Were these banks the holders of casino licences rather than investment banking licences, and confessed to fixing the odds, they would now be out of business. And rightly so. So might we now expect more urgent action to force banks to change their dubious ways?
In his Commons statement on the rate-fixing scandal, the Chancellor, George Osborne, held fast to his old line that the root of the whole problem was the light-touch regulatory regime introduced by New Labour. But this Chancellor has been in post since May 2010. He must have been in the loop, from the start, on where this Libor rigging investigation might be heading.
What has he done to put in place appropriate responses now? Mr Osborne set up the Vickers Commission on banking reform, but now proposes, having had its response, what many regard as a strategy of separation-lite between the conflicting worlds of retail and investment banking.
Even the current governor of the Bank of England, which will replace the FSA as sole regulator of the banks next year, wants more urgent action to break-up monoliths like Barclays completely, separating their high street arms and casino-style trading operations into distinctive, ring-fenced balance sheets.
And if the FSA currently has no criminal sanctions it can deploy against those who manipulate the Libor system, why hasn’t the government been developing fresh options on that front, while this investigation was proceeding?
If the culture of what Mervyn King calls “excessive levels of remuneration, shoddy treatment of customers and deceitful manipulation of one of the most important interest rates” is to be broken at last, more of the worst perpetrators need to discover that instead of ritual hand-wringing, what they need to experience is a spell in prison as common criminals to bring them to their senses.