Britain's Barclays Bank was fined £290 million last week for manipulating interest rates over more than five years. Its CEO as well as a number of other senior figures have resigned in a scandal that is snowballing fast. It all centers around LIBOR, the London Inter-bank offered rate, a benchmark interest rate that sets prices on a whole host of financial products around the globe. It is probably the most important number in finance and it now appears that not just Barclays but several banks have been rigging this number for years for their own advantage, not just in Britain but around the globe. It is banking fraud on a grand scale. Barclays is in the eye of the storm. Their now former CEO, Bob Diamond, appeared to answer questions before MPs in parliament this week. He wasn't terribly contrite. Not only was he not to blame, but Barclays had the approval, even the encouragement, of both the Bank of England and members of the British government to give lower figures than the prices they actually paid. This was in late 2007 when the financial crisis – the first one – was in full swing. Banks were reluctant to lend money to each other, and the higher the rate reported, the weaker a bank appeared, a vicious circle that undermined confidence. Barclays were reporting figures higher than other banks. It made them and the British banking sector look weak. Mr. Diamond was gently told that it would be better if Barclays adjusted its figures. They duly did. Will we ever trust banks again? Should we ever have trusted them at all?
LIBOR comes from a time when it was easier to place your trust in banks. It is not an actual rate but an estimate of what banks pay to borrow money from each other, an estimate based on the daily reports of 18 banks. In other words, it is based on what bankers tell us. And yet, massive profits and losses are made on even incremental changes in this rate, for the very banks that produce the figure. Bob Diamond is said to have brought in a culture of “high risk, high reward” during his tenure at Barclays and this culture is now being blamed for the “rogue” and “reprehensible” behavior of a “minority” who lied in order to increase profits. Come on now! Is this not just what has become normal banking behavior? It's also a bit of a tall order when up to 20 banks are being investigated for fraud, an international investigation, to believe that somehow traders at Barclays behaved in a way that was markedly different to their colleagues at banks across the road and across the border. Is this not a systemic problem with modern banking? For a start, am I the only one to be surprised that banks self-report the interest rates that they pay to borrow money from each other? Why is it we mere mortals have to prove what we earn and what we pay, whereas they can just report it? Then there is this apparent surprise that traders want to maximize short-term profit. Surely that's what they're wired to do? If you're a humanitarian who wants to change the world for the common good, you wouldn't choose to be a City trader. Greed is the motor in the City, making money is what City bankers do. The question is not why did they lie about interest rates, but how they could get away with it for so long - and whether they were encouraged to do so by a government keen to stave off yet another financial crisis. There are two aspects to the rate rigging. There is the daily fiddling of individual traders colluding together in order to budge the rate a basis point or two in order to make a profit and there is the more political and more serious under-reporting of the numbers in order to make the bank look stronger. Which brings me back to the high risk, high reward culture. The problem is not that high rewards demand high risk – that's a given – but that the burden of risk and the rewards reaped do not seem to fall on the same shoulders. Am I the only one who feels that bankers take high risks with other people's money and reap the rewards for themselves? Take Bob Diamond. He has now fallen on his sword and resigned, but he will go with a severance package estimated at around £20 million! Yet millions of ordinary home owners in Great Britain will probably see their monthly mortgage payments rise as a result of corruption at Barclays and other banks. There is in any case something obscene in the concept of golden parachutes. We can all understand why people successfully running big institutions should be paid accordingly, but, why oh why, are they so handsomely rewarded for failure? But on a wider scale, what is shocking is the extent to which the banking sector has become so critical to the world economy that governments will do almost anything to protect it. As this scandal continues to unfold, with investigations in the US, Canada, Switzerland and elsewhere, bankers may find that the writing is on the wall. The times they are a-changing.– Imane Kurdi is a Saudi writer on European affairs. She can be reached at [email protected]
