LIBOR: Why We Haven’t We Paid Enough Attention?
In this day and age the cases of fraud and manipulation in the financial world have become all too frequent. Large investment banks are so focused on churning out short-term gains, that they often leave ethics and values out of their operations. This in turn has led to a number of these institutions taking several short cuts in the way they operate. Although these shortened methods may reap short-term rewards, they often result in stakeholders in the company and the larger community being adversely affected. This trend was illustrated on an enormous scale with the 2008 financial crises where the lack of research and prudence caused the housing bubble to collapse which in turn forced thousands of people from both their jobs and homes. One would have thought that this catastrophic event would have forced major financial institutions to adopt better business practices that would prevent a similar occurrence from ever happening again. Unfortunately, this has not been the case. The financial world has continued to suffer from similar scandals that have taken place at banks such as UBS, JP Morgan, and Barclays. Thus, this paper will argue that the recent Libor scandal was the largest insider trading scandal that has occurred post-2008. In doing so, this paper will also illustrate how the frequency of these financial scandals has caused the public to largely ignore them. With that said, the argument that this paper poses will seek to emphasize why people should care more about the Libor scandals and the ramifications it has not just for Barclays, but also the wider financial community.
In order to first demonstrate the gravity of the Libor scandal, it is first important to define what it is and explain the scandalous events that took place last summer. George Gilligan describes the Libor interest rates and how they are calculated in his case study on the scandal when he writes, “Libor… is a basket of interest rate benchmarks that are calculated on a daily basis across ten currencies and fifteen different time periods, (from overnight to one year), based on daily submissions from panels drawn from Libor’s member banks” (Gilligan). These rates are extremely important because they are one of the most frequent mechanisms used by banks to determine the amount of money individuals receive or pay back when they either invest in short term commodities or take out mortgages. Gilligan goes on to further describe the need for these rates when he writes, “As the Wheatley Review itself notes Libor was established in the 1980s in order to provide a fair and standardized interest rate benchmark for loans, thereby facilitating the growth of the syndicated loans market’” (Gilligan). However, with the ensuing scandal that occurred, it is clear that banks manipulated the true purpose of these short-term rates in order to make financial gains for themselves.
Following the realization that several UK based banks, especially Barclays, manipulated the Libor rates, there was a huge outcry for there to be a large scale investigation. With that said, people not only wanted to know about the involvement of banks in this scandal, but they also wanted to know how regulatory authorities were not able to detect the scandalous actions of Barclays and other UK based banks sooner. Having taken these points into account, the Financial Services Authority, a UK based financial regulatory agency, launched an investigation into Barclays and other banks as well as into their own agency. Through taking these actions, the FSA sought to send a message to both large financial institutions and its own employees. Consequently, the FSA first conducted an investigation into Barclays and, after having found that the company had violated principles 2, 3, and 5 of the agency’s Principles for Business, fined them £59.5 million. After concluding this investigation, the FSA launched its internal investigation and found that “Following the publication of the Final Notice, Barclays disclosed to the Treasury Committee 13 contacts that it had had with the FSA about lowballing between 6 December 2007 and 30 September 2008, three of which are referred to in the Final Notice” (FSA, 3). In this case, lowballing was a tactic used by Barclays Capital to convince the FSA that it was operating within its proper guidelines. With that said, one of the most troubling aspects that this report found was that several of the agency’s employees failed to realize that this was occurring. Each of these communications that had taken place between the FSA and Barclays were documented in the FSA’s report. In its report, the company describes how it identified 74 sets of communication from over 97,000 documents that indicated that there were instances of lowballing occurring (FSA, 5). In addition to this finding, the FSA also discovered that there were instances of insider trading that had occurred before and after the period that the investigation was focusing on which was between January 2007 and May 2009. Hence, without knowing how long these trade manipulations were actually occurring, it makes this case even more terrifying. In order to demonstrate timeline and amount of this insider trading scandal, the following chart has been attached. From observing the chart, one will be able to see how Barclays was successfully able to change its prices over the latter half of the last decade in order to reap in handsome profits.
Given the gravity of this scandal that was detected last summer, it is bewildering how the public has generally failed to realize the implications for Barclay’s actions. One of the issues with this case is that people who are not very familiar with the financial world just think that it is just another case of insider trading that has occurred. Not to say that a lot of people weren’t upset, but the amount of protest that should have resulted from the scandal failed to take hold. What people have failed to realize is the caliber of the authorities and some individuals who appeared to be complicit in this scandal. For example, in his article in Rolling Stone Magazine entitled “Why is Nobody Freaking Out About the LIBOR Banking Scandal”, Matt Taibbi explains how “Most intriguingly, or perhaps disturbingly, there were revelations last week that Bank of England deputy Governor Paul Tucker had a conversation with Diamond at the peak of the crisis in 2008” (Taibbi). Taibbi goes on to explain that “The conversation reportedly left Diamond… with the impression that the bank had carte blanche to rig LIBOR downward in order to help allay spiraling public fears about the banks’ poor financial health” (Taibbi). This statement is in it of itself scary. The fact that there is evidence that Barclay’s former CEO, Bob Diamond, was conniving this scheme with the Bank of England’s deputy governor has to make one wonder if similar financial conspiracies are occurring in other financial hubs around the world. Hence, people must grasp the seriousness of this situation in order to no only prevent a dangerous precedent from being set, but to also potentially expose other similar scandals.
With the previous point taken into account, one has to really discover why people are not as concerned with the Libor scandal as they should be. In essence, how can we find ways to make the public more aware of this scandal and therefore more involved in demanding accountability? Over the last twenty to thirty years the number of financial scandals occurring around the world have been increasing at an alarming rate. The argument could be made that these scandals are occurring because of the lack of public interest in demanding accountability. This sentiment has allowed large financial institutions to therefore operate without any real means of checks and balances. As a result of this, banks are so physically and fiscally enormous, that any real efforts to punish them have mostly failed. For example, in the case of punishments for Barclays, George Gilligan describes the inefficiencies of such measures when he writes, “…they are unlikely to seriously hamper Barclays, because despite the damage wrought to its balance sheet by the Global Financial Crisis (GFC) and the fallout from sovereign debt crises in Europe, for the year 2011 Barclays was still able to report a profit of almost £6 billion” (Gilligan). With this taken into account, it makes it even harder for the public to become involved because it appears that these large institutions will always come out with just a scratch. Therefore, it is imperative that accountability and the need for change be drilled into the heads of future generations that enter the real world. In addition, it is vital that the roots and true goals of capitalism be regimented into these same individuals.
Over the course of the last few decades, capitalism has been distorted in such a way that it makes it hard for individuals to practice sustainable business practices. With that said, sustainability and capitalism must become linked in order for any real change to occur in the financial world. With the growing number of fraudulent scandals in the financial world, there has been a nation-wide attempt to bring more awareness to younger generations so that the same mistakes are not made in the future. However, although it appears that we are somewhat on the right path, society as a whole must be willing to take great steps in order to end the trends of deceit and corruption on in the financial world.
A Review of the Extent of Awareness within the FSA of Inappropriate LIBOR Submissions. Rep. Financial Services Authority, Mar. 2013. Web. 30 Apr. 2013. <http://www.fsa.gov.uk/static/pubs/other/ia-libor.pdf>.
“Barclays Libor Premium.” Chart. CRSconnected. N.p., 8 July 2012. Web. 7 Apr. 2013. <http://www.csrconnected.com.au/wp content/uploads/2012/07/Libor_barclays_Bloomberg_via_The_Telegraph.jpg>.
Gilligan, George. “The Libor Scandal: Another Example of Neutralised and Routinised Deviance in the Financial Services Sector.” UNSW: Centre for Law, Markets and Regulation. N.p., 23 Mar. 2013. Web. 27 Mar. 2013. <http://www.clmr.unsw.edu.au/article/ethics/libor-manipulation/liborscandalanother-example-neutralised-and-routinised-deviance-financialservices-sector>.
Taibbi, Max. “Why Is Nobody Freaking Out About the LIBOR Banking Scandal?” Rollingstone.com. Rolling Stone Magazine, 23 July 2013. Web. 27 Mar. 2013.<http://www.rollingstone.com/politics/blogs/taibblog/why-is-nobody-freakingoutabout-the-libor-banking-scandal-20120703>.