Sound and fury but no action
Are the myriad devious ways that the banksters have devised to make money finally catching up with them? Revelations in Europe and the US about the cunning, corrupt and sometimes criminal ways that big banks and financial companies used to make money are leading to a fine steam of moral indignation and outrage.
Politicians and financial regulators have joined in the chorus of condemnations. It is great theatre, but the authorities are still shuffling the blame between themselves.
The real proof of progress will be when shareholders curb bank managements, reduce their ridiculous salaries and generally clean house; when politicians cut too-big-to-fail banks down to size; and when regulators bring criminal charges against the biggest banksters.
Revelations in the past week have shown that a culture of greed and corruption has infected the financial business in the West. Barclays chairman Marcus Agius resigned this week, partly to save the neck of the bank's chief executive Bob Diamond after Barclays was given a record GBP290 million fine (HK$3.53 billion) over a complex bid-rigging process setting Libor rates. Then Diamond stepped down as chief executive yesterday. Agius will now stay on until replacements are found for both posts.
Libor - which stands for the London interbank offered rate - is the interest rate leading banks in London charge when lending to other banks. The rate, set daily along with its equivalent Euribor, is a benchmark for all sorts of interest rates on products from home mortgages, business loans and credit cards to complex derivatives, not only in Britain but all over the world. More than US$800 trillion of investment products have their interest rates linked to Libor.
The complex fine levied on Barclays by British and US authorities is only the start. The authorities in Britain, the US, Japan, the European Union, Canada and Singapore are pursuing inquiries about market manipulation and collusion over a period of at least five years and involving 20 other big banks besides Barclays. Citigroup, HSBC, and UBS are reportedly among the roll call.
There will also be a spate of billion-dollar lawsuits from aggrieved victims. US broker Charles Schwab has already launched a lawsuit accusing Barclays, Bank of America, Citi, HSBC and JPMorgan among others of violating antitrust, racketeering and securities laws. Schwab also claims that the 'under-reporting of Libor had a US$45 billion effect on the market, representing the amount borrowers [meaning the banks] did not pay' investors who had bought its financial products.
The Canadian Competition Bureau has filed an affidavit against a number of banks, including HSBC Canada, demanding that e-mails and other documents be handed over.
Documents released by the British authorities show a cosy club of callow traders. 'Dude, I owe you big time! Come over one day after work and I'm opening a bottle of Bollinger,' one e-mailed when his counterpart fudged the numbers. A basis point move in Libor would mean a net gain of 'about a couple of million dollars'.
A Barclays banker wrote to 'manager E' in December 2007 that 'we are being dishonest by definition and at risk of damaging our reputation in the market and with the regulators.' Another manager ordered an employee to lower his Libor submission 'to send the message that we're not in the sh*t'. A higher submission would have suggested that the bank was in financial trouble.
The obvious question is how high up the food chain knowledge of collusion went. If top managers did not know, were they doing their jobs? Equally, how did it take so long for regulators to move in?
The reputation of the City of London is also on the line, as is that of leading politicians in successive British governments. Gordon Brown, then British chancellor of the exchequer, boasted in 2006 that he resisted a 'regulatory crackdown' after the WorldCom scandal and promised a 'predictable and light touch regulatory environment', a promise that doesn't seem so wise now.
The president of the Confederation of British Industry, Roger Carr, also chipped in with his own fulmination, declaring that: 'The manipulation of the Libor arrangements is deplorable and undermines international trust in the City of London. The weakness must be addressed and the culprits punished.'
And British Business Secretary Vince Cable said that 'incompetence, corruption and greed have been endemic in British banking' and that the system is 'faced with a quagmire of almost Biblical proportions'. Where will the war of fine words end? In action?
It would be a mistake to assume that financial London is uniquely at fault.
Financial fudge is unfortunately a global problem. The Bank for International Settlements (BIS), the bank for the world's central banks, last week drew attention to the issue of bogus balance sheets at the world's biggest banks. 'The financial sector needs to recognise losses and recapitalise,' the BIS said. Unfortunately, the BIS itself also offered no sticks. Fulmination, not action, seems to be the order of the day among scared Western politicians.
Derivatives and other financial products worth this amount in US dollars are linked to the Libor rate