With being about half way through the semester, we have discussed several important topics in class pertaining to the perils and problems that currently exist on Wall Street and other areas of big business. This considered, I thought it was important to find a case that discussed more than one of these issues that we have discussed in class. Consequently, I wanted to a find a case that discussed both the issue of shareholder value thinking and how financial institutions have grown to large to be dealt with effectively. Thus, I found a case on the Libor scandal entitled “The Libor Scandal: Another Example of Neutralized and Routinized Deviance in the Financial Sector” written by George Gillligan at the University of South Wales. This case was interesting because it explained the intricacies of the Libor scandal and how the case illustrated multiple problems that exist in the investment banking industry. Although Gilligan does not refer to shareholder value thinking directly, he does discuss how Barclay’s manipulated Libor in order to maximize the return from the loans that the bank was lending out. One of the most important aspects about Libor, as the case explains, is that it is a benchmark used to establish short term interest rates. With that said, it is important to take notice of the phrase “short term”, because this mode of thinking is one of the main flaws of shareholder value ethics. Thus, as a result of manipulating Libor to increase these rates, the case explains how Barclay’s was successful in generating substantial returns.

In addition to the short comings of shareholder value thinking, this case also describes how large financial institutions, such as Barclay’s, have become too big to effectively be dealt with. The case illustrates this point through describing how Barclay’s was basically unaffected by the over $400 million it had to pay in penalties. After these penalties were assessed, Gilligan describes how the bank was still able to bring in a profit of nearly six billion pounds. This is significant because, as Gilligan explains, the bank was able to do this not only in the midst of this scandal but while also dealing with both the global financial crises and the European sovereign debt crises.

4 responses »

  1. Charles says:

    This case would be interesting if you decided to write about it, I would be interested to hear what qualifies as long-term? It seems for financial institutions it could vary, I think it would be helpful for an amount of years to be agreed upon. This way their is not any confusion, or loopholes created by crafty businessmen.

  2. Loukas T says:

    This case is far different than anything we have talked about simply because it largely does not involve an American company. Everyone in class knows the ins and outs of our political system and how it can affect our private sector, but I would assume not many people know about Europe or, more specifically, the United Kingdom’s political system or its government structure. The response to Libor scandal may have been largely different than the response if it happened in the US. While the UK and the US have similar economies, the EU is far different than the US. Most notably, the US has a 7.8% unemployment rate right now while the Eurozone has 12.2% unemployment and is still rising.

    • Jordi says:

      Good point about differing assumptions we may bring to the LIBOR case. Also, why does the unemployment rate matter? Just curious. I would wonder about political contributions, autonomy of regulators or auditors, and such.

      Another question is if it is really that different- maybe there is a global network of financial professionals and organizations who spread and share outlooks (shareholderism) and techniques (collateralizing debt, manipulating inter-bank rates)?

      That is also a question we have not addressed in class. Is there a global financial system that operates by its own rules (and hence national differences are declining in relevance)?

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