Manipulating markets constitutes corporate fraud, regardless of whether or not those who engaged in such activities believed they had the cover of the Bank of England to do so. So it’s right that the Serious Fraud Office has been given the resources it needs to investigate Libor-gate and if parliament also wants to conduct its own investigation, it of course also has the right to do so.
But it is wrong to link this – extremely serious – issue into the general debate about either banking pay, the causes of the crisis, or whether or not the retail and wholesale operations of banks should be separated. Each of these three issues – pay, blame, universal banks – still stands or falls alone on its merits.
It does not appear to be personal gain that motivated those involved in this alleged fraud, but a concern that the higher borrowing costs faced by Barclays were destabilising both that company and the entire financial system. Corporate and national gain, rather than individual, except insofar as people may have felt they were instructed to act in this way and did not question their line managers.
We need to get to the bottom of the debate on bankers’ pay regardless of who reported what lending rate to whom and why. My own view is that there’s nothing wrong with a company agreeing to pay an individual a certain amount to perform a certain task. If that task is not in the national interest then that is a matter for the regulators. If it’s not in the company’s interest then the company will suffer, which will be of concern to its owners (not to mention staff and customers). It’s the apparently arbitrary allocation of discretionary bonuses, not tied to specific performance outcomes, however, that has little effect on performance and so is ripe for hefty taxation, not the level of contractual pay and bonuses linked to outcomes.
If there is an effective cartel among professionals that is pushing pay up, then, as I argued in a pamphlet last year, the Office of Fair Trading should have its remit expanded to look at anti-competitive practices in labour markets. At present they are only mandated to look at product markets.
This, in turn, is separate from what caused the financial crisis, which was basically that products were sold that were more risky than anyone realised, and then spread around the global financial system so that everyone was affected. IMF data shows that by far the largest culprit even after population is taken into account is the United States, but everyone was affected by the tightening of credit conditions that ensued. The response to this is better understanding of risk, tighter regulation and more capital controls to make banks more resilient in the interests of all of us. All of this is happening.
Less clear is what to do about banks that have both wholesale and retail operations, of which Barclays was a prime example. It sounds great on the doorstep to say that we should separate the functions of ‘casino’ from ‘high street’ banking, mainly because the word ‘casino’ has implications of recklessness. But there isn’t much connection between the specialisms of financial institutions and how they fared in the crisis. Northern Rock was, after all, a regional retail bank. It relied for its day-to-day funding on its ability to roll over debt in the wholesale markets, which made it vulnerable when those markets seized up, but it wasn’t in any sense of the word an investment bank; neither were Bradford and Bingley and Dunfermline Building Society, both of whom also failed.
Similarly, Lehman Brothers and Bear Stearns, both of which collapsed, did not have mainstream retail operations. Indeed, research published by the European Central Bank shows that a diversified model of banking is less risky than a specialised one, perhaps because it enables resources to be put where they are most needed in tricky times.
The problem for Barclays is that paying a fine, a criminal investigation and the resignation of its chair and chief executive may not be enough to have seen to pay the price for the rigging of markets. The politics of retribution may come into play. But ultimately, breaking a bank up might only make it less resilient at a time when we desperately need our banks to be robust.
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Kitty Ussher is a research fellow at the Smith Institute and a former economic secretary to the Treasury. She writes the monthly Economy column on Progress and tweets @KittyUssher
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“It does not appear to be personal gain that motivated those involved in this alleged fraud, but a concern that the higher borrowing costs faced by Barclays were destabilising both that company and the entire financial system.”
Umm this sentence doesn’t appear to be true. In fact there appear to have been dozens of e-mails from day traders fiddling the system for short term gain. Hence those e-mails about opening bottles of Bollinger.
Easy to miss I know. Was only reported around half a million times for a solid week.
This article worries me: that the Libor Scandal can be seen as anything other than part of the entire narrative of the banking world, that they are above the law that they are not accountable greedy , and can manipulate aspect of the economy to suit themselves -[mortgage deposit and impact on housing market] and it seemed there was quite a bit of personal gain. An example should be made of the traders who seemed to think they were above regulation and the law .There are thousands of provision in the FSA an Act of Parliament dealing with business ethics in finance. This very much the hear of the problem and not a distraction in my opinion,
“Similarly, Lehman Brothers and Bear Stearns, both of which collapsed, did not have mainstream retail operations” – Kitty Ussher seems to spectacularly miss the point here : separating casino and retail banking is supposed to end the “too big to fail” model , not to prevent failure. Lehman and Bear Stearns could be allowed to fail , but RBS, Lloyds and to some extent Barclays were all able to demand bailouts because they held the retail side hostage – they took risky gambles while secure in the knowledge the state would step in to protect them if it all went wrong. This made them act in a risky fashion to win money and personal bonuses, resting on the captive retail arm. The point of Glass -Steagall type separation is to make it possible for risky banks to fail, while protecting the retail side.
No doubt the SFO will be talking to those 14 traders whom Barclays sacked. I have my doubt if offenses have can be proven,given the culture of traders and the nature of the Libor index built on ‘estimates’. There are of course two cases on in the UK and one in the where swap traders within a banks are on trail for fraud. In the French case the accused claims what he did was with management support. I note that in the English case it has yet to come to trail.
Many industries have publications which give details of prices. Try ‘The Grocer’ These are not to held anti competitive. Locally mystery shoppers tour competitors. In the labour market the same is true. Indeed ONS publish a series. Directors pay for public companies is given in the Annual Reports. ‘Incomes Data Survey’ provides much information at all levels of employment. Salary surveys (the equivalent of the mystery shopper. between companies used to be popular, and Hay claimed to able to tell you on the basis of ‘job analysis’ what you should pay. Given all this I think it would be difficult to prove a cartel in the labour market. At best it is a shared community of practice between consultants who advise remuneration committees.
I note that Northern Rock was a small mortgage bank with a unstable financing model (It’s mortgages were sold on be compounded into derivatives) I bet it will turn out that the collapse of the interbank lending mechanism in autumn of 2008 was a systematic failure rather than the proximate sins of the bankers over enthusiastic adoption of the ‘rocket science’ mathematics of ‘zero risk’.
Even if you separate investment banking from ‘retail’ you except in the simplest cases will you be able to ring fence the retail banks if you allow them to compete for offering loans and borrowing cheaply to provide these.
I see today that the’ innocent’ HSBC is caught up in an US money laundering scandal.
“…breaking a bank up might only make it less resilient at a time when we desperately need our banks to be robust.”
I agree, but new laws should at least try to protect the retail side from the casino side. But, if we separate them completely into different companies then there is nothing to stop the casino side going off-shore. Once outside the UK we lose their tax and we lose control, so we must proceed with caution.
On pay, in a market system with proper checks and balances, if someone is willing to pay extremely high for a service it has economic consequences and is none of my business. However, if shareholders’ resources are being used against their will then they need protection.
On a more general point, we need our companies and we should stop bashing them.
Comment by Anthony Sperryn
These belated comments have the benefit of very recent press comment confirming not only what people fear, but also the intractability of the problem of reforming the financial services industry.
Firstly, about manipulation of markets. Experience has taught me that markets produce values that are ephemeral and change from moment to moment.
The price at which a bargain is struck depends on the financial strength of the participants, the preponderance of buyers over sellers at a particular moment of time, and vice versa, economic factors and the rest. It is not correct to say that markets are, or even can be, perfect. They present endless scope for manipulation in the cutest sorts of ways, starting with timing delays in transactions within an institution.
The second thing to say is that the whole of the financial services industry is founded on market manipulation. As financial instruments and dealing techniques have become more sophisticated, so the scope for the participants to extract profit out of dealing has increased. That is what the industry is now all about.
Unfortunately, the techniques have become so sophisticated that even that king of the jungle, J.P.Morgan Chase, did not know what was going on in its business, failed to control it, and, at latest count, has lost $5.8 billion. If J.P.Morgan didn’t know, it is hard to see that politicians and governments would know, hence be able to introduce appropriate corrective legislation. It would need “shop-floor” experience in the industry to have a chance of getting it even nearly right.
In fact, the industry has attracted the cleverest adventurers in town, and from out of town. In good times, they may make big money with their endless ingenuity (most of which may be legal – ethics is not legislated for and, therefore, doesn’t count).
The bank boards of directors have all this money they don’t really know what to do with and they just let the traders get on with it (“Retail lending and due diligence are such a bore, so let’s just give it to the boys who know how to make money. That, for example, is what sank Barings). There are barrack-room songs that describe the consequences of this negligence.
Similarly, the British government gave free rein to the financial services industry without bothering to find out exactly how it made its money. The Conservatives are not known for their brainpower and, for Labour, there is an innate yearning for workers’ control and a failure to get to grips with and understand the real world of big finance.
There is a strong case for putting the whole of the banking system into the dustbin and redefining what banking ought to do. The world being what it is, however, one will have to start with existing institutions. But that does not mean they cannot be drastically remodelled. If we want “strong” banks, they don’t have to be the ones we’ve got.
What we need are
(1) a money transmission system (come back Post Office giro, all is forgiven),
(2) a mechanism for savers to invest securely, both short-term and for their old age (more granny bonds, please),
(3) a mechanism, for savers who take a more sporting approach, to participate in higher risk/reward activities. For (3), stock exchange investment and collective investment media are now perverted by inaccessibility or high charges, open or hidden, or both.
SME lending should be restructured, with an equity element introduced, so as to put the risk on those best able to accept it. There are business angels out there, but secrecy, for competitive reasons, and greed, make it a difficult area of business. (Come back ICFC, even if you call yourself “National Investment Bank”, but only borrow long-term and not in the interbank market, if you must borrow; and, this time, stick to your last, as a good cobbler should)
As this stage in the game, it is not reasonable to expect bombed-out banks to put money up, but they are now able to do so to a small extent with the help of the government force-feeding them with funds.
(4) a mechanism for people to borrow to buy houses and flats (come back building societies, many of which disappeared because their former leaders were seduced by the big-time in finance and took the chance of making lots of money through share options). Houses and flats really ought not to be a vehicle for speculation, as happened in the run-up to the crisis.
Banks should not direct retail deposits towards corporate lending, other than under strictly controlled conditions. Insurance companies and pension funds are the institutions that are able to take a long-term view of investments, not banks.
The fashion for banks to put up loans for mega-takeovers now appears to be coming to an end. It should never have been allowed to take hold. Takeovers have been shown to be value destroying in many cases and the costs borne by the State from resulting unemployment must be a major contributor to the UK deficit.
The matter of casino and retail banking is, in my view, incorrectly defined. The proper split is the agent/principal one, which was at the heart of Glass-Steagall. The universal banks have an ambiguous role in this respect and what can arise is lack of competition and crony capitalism. I would be surprised if the ECB research is up-to-date and fully takes account of the Greek losses the French and German banks are likely to have incurred.
In any case, it should be remembered that lending money can be extremely risky. Investing money can also be risky. A fool is soon parted from his money. Luck comes into it, too. The banks, traditionally, have managed to fudge the distinction between the long-term and the short-term, but failure easily arises when any one transaction constitutes a disproportionate amount of the worth of an institution, be it bank, insurance company or pension fund.
Anthony Sperryn 16/7/2012