Gerald Warner: Libor scandal brings toxic banking closer to event horizon

‘SAFE as the Bank of England’ – there is a cliché that has become obsolete. The terms “safe” and “bank” no longer fit naturally together in any word association test.

The news that the Serious Fraud Office, rather belatedly, is moving to investigate the Libor scandal puts the banking crisis into its proper context: criminality.

The one indignant cry that served errant bankers well during the early stages of the Libor debacle was the populist wail: “It is outrageous that those responsible cannot be prosecuted – we need new legislation to prevent this happening again.” That was music to the ears of guilty interest rate manipulators, since it disseminated the presumption of immunity for past wrongdoing. New legislation? What is wrong, may one ask, with the comprehensive remit of the Fraud Act 2006? Listening to many commentators, one might imagine it had discreetly been removed from the statute book, like some redundant enactment of Edward III. There is no lack of legal mechanism for pursuing fraudulent bankers; what is lacking is the will to do so.

That backwardness is no longer simply due to establishment cronyism, though there is plenty of that around. It has been possible to detect in financial and political circles over recent weeks the dawning of a genuine fear – even disinterested in some cases – that rigorous investigation of the banking and financial system could reveal impostures so deep-rooted, massive and far-reaching as to implode the global economy. It is like a giant version of one of those toxic packages traded by banks pre-2008 which nobody wanted to unwrap for fear of what would be found. The unspoken question – the elephant in the boardrooms and treasuries – is this: what else did they rig, beyond Libor?

The most deceptive feature of Libor is the name “London” in its title. When the “London inter-bank offered rate” was devised by the British Bankers’ Association in 1984, in recognition of the City’s new eminence as a financial centre, its outreach was inevitably global. With 18 member banks and ten currencies involved it could not have been otherwise. Libor was also the benchmark for traders engaged in interest rate derivatives; by the end of last year, the amount outstanding in over-the-counter derivatives based on interest rate contracts was $504 trillion. It has been calculated that a movement of 0.01 per cent in Libor could have netted an individual trader a profit of $2 million. Such figures put Barclays’ £290m punitive fine into perspective – no wonder its shares rose after the announcement.

Now the rate-rigging investigation is extending to embrace the European inter-bank offered rate (Euribor) and the Tokyo inter-bank offered rate (Tibor) as well, which does not leave many areas of the global economy immune. Financial brokerages and hedge funds, though currently on the periphery of the investigation, are relentlessly being brought into the frame.

Joe Public was there from the start, since Libor dictates mortgage rates, business loans and credit card charges, all part of the fabric of everyday life for the average citizen. Ironically, since the interest rate was manipulated both upwards and down, some people may have benefited from a dishonest rate. That is no mitigating factor: a free market depends on honest data or it cannot operate for the common good. The problem that is now haunting senior financiers and politicians is the fear that the market may already be so diseased as to be in a terminal condition, though it is not polite to say so.

During the credit-fuelled feeding frenzy pre-2008, bankers invented ever more sophisticated instruments. Their clients did not understand them, nor did most of the bankers. Like man-made debris in outer space, mysterious toxic parcels are floating around in the banking system. One of the most sinister asteroid belts in the financial galaxy is composed of off-balance-sheet bank assets (in the euphemistic world of banking “assets” describes what normal people would term liabilities). The four largest banks in America may collide with $1 trillion of these hazards before long. The extinction event that looms over the global economy is the straightforward question: what happens if there is more debt than money in the world?

This developing crisis has a profound political significance, not in the puny context of George Osborne and Ed Balls bawling playground abuse at each other but in an ideological sense. Dinosaur Trots may revel in the unravelling of capitalism, but the cultural Left is alarmed. Frankfurt Marxism needs a rich economy to build its Utopia. Bankers and capitalists are eminent promoters of political correctness, cf. Melinda Gates’ population control conference in London this week. Multiculturalism, affirmative action for minorities, aggressive secularism and control of free speech will not flourish in a restored hunter-gatherer society bartering vegetables, cattle and brides. It’s an ill wind. «