The news about Barclays being fined for manipulating LIBOR etc is yet another example of the appalling culture of greed that has developed in not only commerce at large but more specifically the financial services sector. Of course, the financial services sector has been involved in mis-selling, other major scandals and atrocious failings during much of the last decade and the regulators have as much to answer for in respect of all these scandals as those who benefited from them financially. Indeed, in 2008 the Federal Reserve in the USA were told by a whistleblower that Barclays were manipulating their submissions for LIBOR and advised the Bank of England who did nothing about it.
These scandals in the financial services sector have been brewing for many years. For example, Jeremy Berkowitz of the USA’s Federal Reserve wrote a paper on his concerns about LIBOR fixing in 1998 after LIBOR reporting “errors” had been noted by the Federal Reserve some years earlier. His paper, entitled Dealer Polling in the Presence of Possibly Noisy Reporting starts with the following statement “It would be difficult to overstate the importance of the role played by interbank rates, such as Libor, in the valuation of global financial assets.” In his conclusion he notes that “The reliance on dealer polling is widespread in financial markets.”
Did he do anything of consequence about his suspicions? If so it has remained a well kept secret for over a dozen years. However, what Jeremy Berkowitz did do by publishing his erudite article was to inadvertently explain the mathematical and other nuances of how to fix LIBOR to those who might have been interested in doing so. Thus, the publication of the article was arguably a faux pas rather like publishing a learned scientific article explaining what were the most formidable chemical contents of IEDs. Apart from this paradoxical helping hand extended to those who wished to fix LIBOR (and EURIBOR, TIBOR or other polled rates) one might legitimately ask just how many regulators in all those financial markets he refers to in his article have been asleep on their watch for over a decade?
It is typical of the global banking regulators to make comments such as Sir Mervyn King did in response to the Barclays revelations saying adamantly as if it were not his fault that the culture of the UK banking industry must change. Given his responsibilities in the last decade and more besides surely he and his counterparts around the world should bear some if not a lot of the blame for the cultural deficiencies he refers to which nearly wrecked the entire global financial infrastructure?
Indeed, Bill Fairclough can recall writing warning letters, inter alia, in a blog in the FT on 30th November 2007 ahead of and about the impending financial crisis that was, in his opinion, inevitable. That crisis was caused by a multitude of enormous scandals which had been growing for some years but were still escalating in 2007. Most of them (eg the US sub-prime mortgage debacle and the securitisation of other car boot sale left-overs) were clearly visible by then as the article states but were largely ignored by regulators and central bankers. As predicted those scandals and mammoth frauds led to the market meltdown in 2008 and the ongoing economic malaise since then.
Bill wrote somewhat prophetically that ” … we may look back in anger and say “Never in monetary terms was so much taken from so many by so few”.”
In considering who is responsible for what and bearing in mind the old saying about where the buck stops is it fair that the CEO of a bank be made the scapegoat of a witch hunt by politicians who have much to be ashamed of too? Some led by the media will say yes but what if the CEO had put in place proper systems which failed because of the deceit and/or negligence of those at the heart of the pertinent operations and by the regulators? It is complicated and when you consider that time and time again chain gangs of regulators, rating agencies, central bankers, law enforcement agencies, compliance departments, internal and external auditors as well as risk management completely failed to spot each of the many recent scandals in the financial services sector the waters of responsibility are truly muddied as those box tickers and their line managers should have identified all the failures and reported them to those with whom the buck stopped. Perhaps as noted elsewhere in this web-site (eg in respect of background checks) there is too much reliance placed on box ticking nowadays and not just box ticking by computers.
Faire Sans Dire was involved in one case where a senior well remunerated regulator (Ms X) telephoned us to complain that we hadn’t forewarned her of a financial scandal and that she had to suffer the ignominy of being criticised by her superior officer who read about the scandal in the press before Ms X could report it. On Ms X’s own admission the press was the usual source of her reports to her superior officers. It was just one of those unfortunate events where her superior officer had read about the scandal before Ms X had read it and had time to report it! That is just one recent example of why some senior regulators apparently deserve the overly generous remuneration packages some of them receive. Should Ms X have been made to return her gross salary, abstain from any bonus pool, forego her pension, resign or what?
Regarding interest rate manipulation via the British Bankers’ Association, the blatancy of these large systemic crimes (combined with swap rate fixing) across so many banks makes one wonder not only what some purportedly honest managers/directors were doing or not doing as the case may be but more importantly (yet again) what the many supposed regulators were doing or not doing too. We have yet to hear what happened in all the other banks involved and in all probability what other rates and indices have been fixed.
We don’t want to rub too much salt into the wounds but we could have asked where risk management, internal and external audit, compliance and many others were sleeping for over a dozen years. This is large scale long term fraud involving many hundreds if not more people. What is shocking is that just like the near meltdown of the global banking system in 2008 many well paid people supposedly trained to spot malpractice missed so many obvious signals. Notwithstanding that, determining who in either the management of the banks and the regulators were responsible and who were the victims are not as crystal clear as many may believe either in terms of breaches of criminal and/or civil laws across many jurisdictions no matter how appalled most people will be at what they see or hear in the media on these matters.
For example, Faire Sans Dire has advised on one mixed currency and interest rate swap involving over 20 counterparties spread across over a dozen jurisdictions. In this instance we had to devise diagrams and flowcharts just to understand what was meant to happen in order to help determine what actually transpired which was different. It was complicated further, if that is possible, by the fact that more than four of the counterparties involved were on the panel that “fixed” LIBOR and other relevant interest rates at the British Bankers’ Association. Determining which counterparties in an interest rate swap have misled other counterparties is not always as complex as in that case but establishing what went wrong and what losses have been incurred by whom is rarely a simple exercise.
If anyone reading this thinks he/she has been a victim of interest rate fixing in any way (for example through having taken out a normal but mis-sold interest rate swap) please do not hesitate to contact us for help in determining what if any action you can take to assist quantify and recover your losses. Similarly if other rates or indices in other markets are shown to have been fixed and you have lost out please contact us for help. If you think that you are immune from deceit and this sort of thing can’t happen to you then maybe you should contact us too!
This article was first published on 29th June 2012.
Our headline implying there were “more to come” has as expected proven true. As of 26thOctober the number of banks subpoenaed in connection with the LIBOR scandal has reached 16 according to Bloomberg and that is just in New York and Connecticut.
After the Bloomberg article referred to above was published the media coverage of this debacle has as we expected exploded as a quick Google search for more recent press articles on the “LIBOR scandals” or the like will prove.