A rotten apple or an infected garden?

It is now becoming clear that international banks have, in the pursuit of profit, been involved not only in reckless financial transactions but also in outright fraud. The manipulation of the London interbank lending rate (Libor), arguably the largest financial scam ever attempted, was not the handiwork of a few individuals operating within Barclays bank. It was a systemic fraud involving an international cartel of banks.

Roberto Bissio

MARCUS Agius is a gardener. His passion for plants led him to the presidency of the Royal Botanic Gardens, Kew, which was founded in 1759 by Princess Augusta, mother of King George III, and which currently has over eight million specimens in its herbarium in London.

Agius was appointed in 2006 as the first non-executive director of the BBC, a keeper of the integrity of British broadcasting. That same year Agius was called to manage the rescue of Barclays bank, which was on the verge of bankruptcy due to irresponsible financial bets. Continuing the tradition of his father-in-law, Edmund de Rothschild, also a horticulture enthusiast and a prominent member of the family of financiers who made the City of London the reference point of global banking, Agius combined business management with philanthropy and moral preaching.

Held as a model of elegance and good manners, Agius often changed his tailored suits for khaki pants and a wicker hat to be photographed shaking hands with beneficiaries of Barclays' assistance programmes in slums around the world, thereby promoting 'corporate social responsibility'.

When the global financial crisis erupted in 2008, Barclays was one of the few banks that did not need an official bailout, because Agius negotiated its partial sale to several Arab emirs. Explaining the causes of the global crisis, Agius said that 'they saw so much money being made in investment banking and trading, they said: "I must have some of that," and they just didn't have the historical experience or the deep-down culture'.

'Unacceptable behaviour'

On 2 July, the City woke up to the news of Agius' resignation from all his public and private offices. 'Unacceptable behaviour within the bank,' he explained, had been penalised with a record fine of $455 million and resulted in 'a devastating blow to its reputation'.

The 'unacceptable behaviour' is nothing less than the largest financial fraud ever attempted: the manipulation of the Libor interest rate, a white-collar theft of billions of dollars that has duped governments around the world and ultimately impoverished millions of people who had never heard of Agius, Barclays or the City of London and just happened to have borrowed money from a bank.

After years of detective work, both in London and in New York, involving not just the financial regulators but also the FBI, Barclays became the first bank to be fined for its wrongdoings, but a dozen other big financial institutions are also being investigated. On top of the bulky fines, which in the case of Barclays amounted to around 10% of its profits of 2011, once the fraud is proven the participating banks are likely to be sued by their victims, which can mean huge class actions.

Bob Diamond, the chief executive of Barclays, could not claim ignorance of the illegal operations and was forced to resign and forfeit 20 million pounds in bonus payments. In spite of his resignation, Agius will lead the board in search of a replacement.

Libor, which stands for 'London interbank offered rate', is the average rate at which major banks in the British capital lend money to each other. Financial transactions worth over $800 trillion, from governmental bonds to simple house mortgages, all are contracted regularly with interest rates based on Libor. A small variation up or down makes the balance between debtors and creditors oscillate in the millions. The euro area has its Euribor and Japanese finance its own index, but six decades after the end of the British Empire, Libor continues as the global benchmark.

The Libor manipulation makes the Madoff fraud on Wall Street or the manipulation of deficit numbers by the Greek government appear like minor misdemeanours, and some analysts are already talking about 'the biggest scam in history'. The cheating happened over several years and the modus operandi was surprisingly simple.

Libor is calculated every day by order (and under the supervision) of the British Bankers' Association, which was coincidentally chaired by Agius, until the scandal exploded. The daily number is averaged by the Thomson Reuters news agency, and it is not based on the actual operations of banks lending and borrowing to each other, but on the answers given by big banks to the question of what rate they would pay if they were to borrow money today. 

Together with several similarly indebted big banks, Barclays manipulated Libor down with bogus offers. In some cases this was done to favour traders in the derivatives markets: 'Dude. I owe you big time! Come over one day after work and I am opening a bottle of Bollinger [champagne],' says one of the interbank e-mails now offered as evidence. Most of the time Barclays artificially lowered the Libor rate to avoid having to pay high rates for its enormous debts. The British Parliament is now investigating how this fraud could be carried out unnoticed for several years, jeopardising the credibility of British banking.

The manipulation helped hide the real financial situation of Barclays and other heavily indebted large banks, making them appear more solid than they really are and easing the pressure for reform.

A week before the scandal, the Bank for International Settlements warned in its annual report that 'banks must adjust their balance sheets to reflect the real value of their assets and ensure a rapid recapitalisation' (an honest assessment which can be fatal for many institutions). The BIS, which is the central bank of central banks around the world, argues that 'governments must reform the banking system and limit its size and importance' to ensure that in future the bankruptcy of a bank does not trigger a new financial crisis.

Chakravarthi Raghavan, Editor Emeritus of the SUNS bulletin in Geneva, sees nothing new here: the BIS 'has identified these problems in the past and proposed remedies'. However, the medicine is never implemented because 'the financial sector has captured the political process'.

The British Parliament must decide now if the Libor case is explained by the traditional metaphor of the rotten apple present in every basket, or is more like a fungus that has infected greenhouses massively... carried around by the gardeners.                   

Roberto Bissio is Executive Director of the Third World Institute (ITeM) in Montevideo and Coordinator of the Social Watch network. An earlier version of this article appeared in Spanish in Agenda Global (No. 73, 6 July 2012).

The international dimensions of the Libor scandal LIBOR and Euribor (euro interbank offered rate) are two of the crucial mechanisms for setting interest rates on a vast array of financial products. Libor is the largest and most variable rate, covering 10 currencies. It even helps determine the rate of the US dollar in the form of eurodollars. Traders in London, New York, Japan and elsewhere colluded to manipulate the Libor rate so as to make massive profits or conceal losses, at the direct expense of pension funds and mortgage and loan holders. These practices, involving what the British Financial Services Authority (FSA) admits were 'a significant number of employees', played a major role in determining the extent of the global financial crash of 2008. A former Barclays executive who was close to the bank's Libor-setting operation told The Mail on Sunday that the Libor misquotes 'gave an illusion of stability and [were] a key factor in masking the severity of the crisis'. A legal case in the United States is seeking damages of $110 billion from Barclays and almost $126 billion from the UK government-owned Royal Bank of Scotland (RBS) - figures far in excess of the bank's market valuations. This alone would make it the financial crime of the century. Yet after investigations going back to 2007 in at least three countries, no one has been prosecuted. Instead, those responsible have earned millions upon millions. It was not until early July that the two leading figures in Barclays, Chairman Marcus Agius and Chief Executive Bob Diamond, reluctantly resigned. Both can expect handsome severance packages. Meanwhile, the British Conservative/Liberal Democrat government has done nothing other than promise yet another toothless parliamentary inquiry - the standard mechanism for burying every crime of the ruling elite from the Iraq war to the News of the World phone-hacking scandal. The reasons are obvious. Far more than a few dozen traders are involved. The 16 banks cited in the class action taken by the City of Baltimore, Charles Schwab Corp. and others include: *   Bank of America *   Bank of Tokyo-Mitsubishi *   Barclays *   Citibank *   Credit Suisse *   Deutsche Bank *   HBOS (holding company for Bank of Scotland of the Lloyds Banking Group) *   HSBC (Hongkong and Shanghai Banking Corporation) *   JPMorgan Chase *   Lloyds TSB Bank *   Rabobank *   Royal Bank of Canada *   The Norinchukin Bank *   Royal Bank of Scotland *   UBS (Union Bank of Switzerland) * WestLB (LB stands for Landesbanken which is no longer part of WestLB) Their respective heads will all claim ignorance of the practices conducted by their traders, despite some of those directly involved saying they were acting under orders. The majority of the Libor-setting banks have either failed, been on the verge of failure or are participating in government programmes to prevent their failure. Because the setting of Libor is 'judgmental' rather than 'objective', I believe the 'feelings' and 'confidence' of the individuals at these 16 banks have a lot to do with the level of Libor. Issues in the London market such as job security, real estate prices, 2008 bonus compensation, layoffs and falling personal net worth have a lot to do with the psychology of the Libor panel. Behavioural science has become more important to understanding Libor than monetary policy and market measures. The door just opened for the US government (Treasury, Department of Justice, and Securities and Exchange Commission) and the Federal Reserve to go after these criminals, recover half a trillion or more, and break up these multi-headed snakes once and for all.         The above is extracted from the article 'Here we go again - the Libor/Liemore banking scandal' written by cobaltbay on the Daily Kos website (www.dailykos.com).

*Third World Resurgence No. 261, May 2012, pp 14-16