Barclays: The Corruption At The Heart Of Financial SystemJuly 6th, 2012 6:04 pm Lynn Zhong
Buried beneath the health care court saga, the Barclays bank controversy — which involves a conspiracy at the heart of the international financial system — has exploded. On June 27, Barclays — the second-largest bank in the United Kingdom and 15th largest in the world – conceded that the bank had intentionally submitted fabricated borrowing costs during the period from 2005 to 2009. While CEO Bob Diamond, who was in charge of the investment branch during the years of the rate manipulation, claimed that he had no knowledge of the bank’s actions, he ultimately stepped down in light of the Barclays misconduct.
Diamond’s resignation followed the order given by U.S. and U.K. regulators that Barclays pay a $450 million fine for lying in its submissions for the London Interbank Offered Rate (Libor), an obscure but powerful indicator. Libor is figure that is set every morning by banks posting the rate at which they are willing to borrow from other banks. Not only does the Libor rate serve as an indicator of the health of the banking system, but more importantly, the adjusted average of the interest rate is used as a benchmark for borrowing costs of credit cards, mortgages, car leases, and more — thus affecting the value of trillions of dollars in contracts and loans. As reported by CNN, “the Libor rates for different currencies are directly connected to 99% of all commercial banking products.”
So how does that affect an average citizen? This is how The Daily Beast puts it: “In simplest possible terms: say you have a $50,000 small business loan or adjustable-rate mortgage, and its interest rate is ’5 percent plus LIBOR’—in fact, a lot are. If Barclays and other banks submit fake figures to raise LIBOR by 1 percent, you’re out $500 more a month. (If they’re the ones who gave you the loan, that’s $500 in their pocket.) And if the banks depress LIBOR, and you’re an investor who owns $50,000 in 5-plus-LIBOR percent bonds (even through a mutual fund), it’s the same story.”
The Barclays personnel in charge of submitting estimates of their interbank lending rates were lobbied by traders to put in figures which would benefit their trading positions. They obliged at the height of the banking crisis, when their high Libor numbers reflected poorly on the bank, consequently leading to Barclays reporting artificially low figures, in order to give the illusion that Barclays was not financially stressed and did not have to borrow at higher rates than its competitors. The intention was to portray the bank as secure during the global financial crisis, and of course, to produce a profit.
A concerning aspect is the nonchalance and carelessness shown in released e-mails between the bank traders and the officials who submit the rate — two groups that are supposed to be separated by an information barrier. One example as cited from the FSA documents:
Submitter: “Hi All, Just as an FYI, I will be in noon’ish on Monday […]”.
Trader B: “Noonish? Whos going to put my low fixings in? hehehe”
Submitter: “[…] [X or Y] will be here if you have any requests for the fixings”.
Break a law or two? Disregard the potential financial consequences in order to focus on your own greed? Sure, why not? Hehehe.
However, Barclays doesn’t seem to be the only institution at fault; as of now, a number of other major banks, including JPMorgan Chase, Citibank, and UBS are under investigation. Seeing that Diamond was forced to step down as CEO, if other financial institutions are also found guilty in complying with the Libor manipulation, heads could roll at other high-profile banks as well. Furthermore, in an even more disturbing allegation, Diamond “spread the blame” through his released documents and Wednesday testimony to the British parliamentary committee, indicating that not only were the regulators aware of the Libor fixing, but some politicians even encouraged it.
Add Barclays as just one of the many banks gaining notoriety as a result of immoral actions that have Americans losing faith in financial institutions. It’s disheartening to discover over and over again the lack of ethics and self-restraint shown by the industry throughout this financially unstable era the world has been thrown into. Barclays’ actions only further pushes the notion that the banking industry should not be trusted to police itself. Nonetheless, Barclays’ fall may not be in vain. In an interview with CNN, an analyst explained why this scandal is different from the Lehman Brothers and similar bank frauds and how this could actually change the banking industry:
The difference is that all of Lehman Brothers’ customers were all filthy rich. Their customers were governments, municipalities, professionals in the financial services industries — they knew what they were doing, there were risks that they all understood.”
But (Barclays) is retail banking: this is human-being-to-human-being, people who aren’t expected to know anything about financial services, they’re expected to be able to trust the banks. That’s what makes this different. In fact, we give these banks a license on the agreement that they never put ordinary customers at risk, and that’s what they did here.
However, Joseph Stiglitz, a Nobel Prize winner and former World Bank economist argues that “without threat of prosecution or jail time…[bankers] would continue to use their elevated status to exploit weak regulations, consolidate power, and avoid accountability.”
On that note, loosening regulations on corporations — a promise Mitt Romney has made — makes no sense. He has consistently advocated to “halt Obama-era regulations”, including the Dodd-Frank Act – a financial reform instilling more regulatory laws on corporations. Barclays, whose employees have contributed a total of $234,650 to Romney’s campaign, doesn’t care about the people, as already shown by the rate-fixing; it cares about the profitability of the bank. And thanks to Citizens United, corporations have more influence than ever. Bob Diamond, a friend of the Republican nominee, was even set to co-host a fundraiser in London before pulling out once the scandal broke. But if anything, bankers’ willingness to cheat and pay off politicians indicate that we need greater regulation, greater transparency, and greater penalties to combat the cozy atmosphere the banks have settled in that has fostered easy corruption.