Passing the Pound in British Bank Blame Game

As far as anyone knows, Barclays (LON:BARC) Chairman Marcus Agius was not responsible for the rate-rigging scheme that earned the large British bank $450 million in penalties last week. But Agius still tried to take the fall by resigning yesterday.

“The buck stops with me,” Agius declared in a statement that was as disingenuous as it was unoriginal. The buck, or rather the pound, only stopped with Agius after it was passed to him by Robert Diamond, Barclays’ chief executive.

Agius’ valor in falling on his professional sword to save Diamond’s job was for naught. Earlier today, Diamond resigned anyway.

It is Diamond, not Agius, who either knew or should have known of Barclays’ improper attempts to manipulate a key global financial benchmark, the London Interbank Offered Rate (generally known as Libor), for its own advantage. It is Diamond and other responsible senior executives who deserve to be looking for new employment. The only penalty Diamond had accepted before today was to agree to forego a bonus that was not yet awarded.

The bank’s directors seemed determined to keep Diamond, despite calls for his departure. The directors appeared to believe that British regulators would not want Barclays to lose both its chairman and its chief executive in quick succession and that Agius’ resignation thus provided some job security for Diamond. We can only hope that British authorities are a lot less timid than that perception of them.

Barclays is the first bank to be penalized in the Libor scandal – a label the situation truly deserves  – but it is unlikely to be the last. Nor is the $450 million in combined American and British penalties likely to be the largest consequence by the time this story reaches its conclusion.

Some of the world’s top bankers, individually and collectively, acted in concert to cheat their customers and trading partners. There will be a lot of cynical remarks about this being the normal course of business, or about something unique in a banker’s DNA that causes such behavior. Generally, I would point out that such vilification is unfair and that we can’t have an economy without banks, or banks without bankers. But it is clear that Barclays and a number of its peers have managed to live down to the public’s lowest expectations.

Libor is an arcane topic if you are not a financial professional, but as one of the key cogs in the machinery of global commerce, it is important to all of us. Libor is the rate, or rather the set of rates (varying according to currency and other factors) at which banks are willing to make short-term loans to one another. It is calculated every business day.

The problem with Libor is that only the banks know what they charge to lend money to one another. If the banks lie about such statistics, how can the rest of the world find out?

A panel of banks (currently made up of 18 institutions for U.S. dollar transactions and varying numbers for other currencies) reports the rates to the British Bankers Association. The BBA then discards the highest and lowest rates, and averages the rest to calculate Libor for a variety of currencies and time durations. Thompson Reuters announces the rates on the BBA’s behalf at 11 a.m., London time.

The rest of the world would not care very much about Libor, however, if the rate didn’t directly determine prices for all sorts of contracts and interest rates. At Palisades Hudson, we once had a client whose home mortgage interest rate reset every month based on Libor. According to Bloomberg, $350 trillion of securities and loans worldwide are valued based on Libor, including a variety of U.S. mortgage products.

Last week, Barclays and its subsidiaries agreed to settle charges that it made false reports in an attempt to manipulate Libor and other global interest rates. The U.S. Commodity Futures Trading Commission cited incidents between 2005 and 2009, and said members of senior management and multiple traders were involved in the fraudulent practices. The British regulators at the Financial Services Authority set their portion of the penalties at 59.5 million pounds (about $92.5 million), the largest fine the FSA has ever imposed. The bank admitted the actions of its staff “fell well short of standards.” Diamond and three senior executives then also announced they would give up their yearly bonuses.

Bloomberg reported that at least 12 firms have fired or suspended traders as a result of internal probes regarding Libor manipulation. Lloyds Banking Group said in March that it was cooperating with the agencies of various governments in their investigations, and that it had been named in private U.S. lawsuits as well. UBS admitted to Canadian regulators in February that its traders and brokers participated in willfully moving the yen Libor. The Canadian Competition Bureau has brought a case which offered evidence that traders from different banks contacted each other to coordinate rates and that traders were involved in estimating the banks’ rates in ways they should not have been.

Though the relative culpability of various institutions is still unclear, one thing is certain: banks were lying. They lied because it benefited them, at certain times, to have a higher or lower Libor (as well as a higher or lower Euro Interbank Offered Rate, or Euribor) due to their positions in various contracts and investments, and because of perceptions during the financial crisis that the banks’ own finances were shaky. Phone calls and emails that regulators uncovered illustrate the sort of direct manipulation involved.

Despite the scandal, British bankers and regulators continue to resist pressure to change the way the rate is calculated, due to the alleged risk of invalidating trillions of dollars in contracts. The panel, created by the BBA, has yet to make any final decisions, but it may propose a code of conduct for bankers and impose greater scrutiny on the rate without changing how it is calculated, according to Bloomberg. Whatever the group decides, the BBA hopes to restore Libor’s credibility.

I suspect that any credible solution will require banks and their senior executives to provide Libor information to government regulators and the BBA simultaneously. If a government reporting obligation is backed by sufficiently tough civil and criminal sanctions, it might coerce the sort of honest conduct that we always thought we could expect from the world’s leaders in global finance.

For years, we have used bankers as scapegoats for global financial problems that are not of their own making. It isn’t fair. Then again, when banks lie and collude against the rest of us for their own benefit and then allow the responsible parties to keep their jobs, they bring scorn down on their own heads. We expect bank CEOs to behave like honest businesspeople, not like stereotypical bankers.

About Larry M. Elkin 564 Articles

Affiliation: Palisades Hudson Financial Group

Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson, New York in 1992. That firm grew steadily and became the Palisades Hudson organization, which moved to Scarsdale, New York in 2002. The firm expanded to Fort Lauderdale, Florida, in 2005, and to Atlanta, Georgia, in 2008.

Larry received his B.A. in journalism from the University of Montana in 1978, and his M.B.A. in accounting from New York University in 1986. Larry was a reporter and editor for The Associated Press from 1978 to 1986. He covered government, business and legal affairs for the wire service, with assignments in Helena, Montana; Albany, New York; Washington, D.C.; and New York City’s federal courts in Brooklyn and Manhattan.

Larry established the organization’s investment advisory business, which now manages more than $800 million, in 1997. As president of Palisades Hudson, Larry maintains individual professional relationships with many of the firm’s clients, who reside in more than 25 states from Maine to California as well as in several foreign countries. He is the author of Financial Self-Defense for Unmarried Couples (Currency Doubleday, 1995), which was the first comprehensive financial planning guide for unmarried couples. He also is the editor and publisher of Sentinel, a quarterly newsletter on personal financial planning.

Larry has written many Sentinel articles, including several that anticipated future events. In “The Economic Case Against Tobacco Stocks” (February 1995), he forecast that litigation losses would eventually undermine cigarette manufacturers’ financial position. He concluded in “Is This the Beginning Of The End?” (May 1998) that there was a better-than-even chance that estate taxes would be repealed by 2010, three years before Congress enacted legislation to repeal the tax in 2010. In “IRS Takes A Shot At Split-Dollar Life” (June 1996), Larry predicted that the IRS would be able to treat split dollar arrangements as below-market loans, which came to pass with new rules issued by the Service in 2001 and 2002.

More recently, Larry has addressed the causes and consequences of the “Panic of 2008″ in his Sentinel articles. In “Have We Learned Our Lending Lesson At Last” (October 2007) and “Mortgage Lending Lessons Remain Unlearned” (October 2008), Larry questioned whether or not America has learned any lessons from the savings and loan crisis of the 1980s. In addition, he offered some practical changes that should have been made to amend the situation. In “Take Advantage Of The Panic Of 2008” (January 2009), Larry offered ways to capitalize on the wealth of opportunity that the panic presented.

Larry served as president of the Estate Planning Council of New York City, Inc., in 2005-2006. In 2009 the Council presented Larry with its first-ever Lifetime Achievement Award, citing his service to the organization and “his tireless efforts in promoting our industry by word and by personal example as a consummate estate planning professional.” He is regularly interviewed by national and regional publications, and has made nearly 100 radio and television appearances.

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