Banking scandal: Greedy, shoddy, deceitful. A modern cesspit
It was a week of truly shocking revelations. Will the banks finally be brought to book for their behaviour?
The events of the past few days are proof that not all organised criminals go around carrying violin cases. Some sit jacketless in City offices, bent over computer screens, rigging interest rates. Others give their salesmen's smiles to small-scale entrepreneurs desperate for a loan, and make them buy products that are as much a swindle as a three-card trick. And, if there's the slightest whiff of official action that might cramp their style, there's always some big-shot to whisper to the Government: "That's a lovely economy you've got there. You wouldn't want it to have an accident, would you?" The voice of the protection racket down the ages.
If that reads like a caricature, it is more authentic than the portrait the banks paint of themselves in their multinational, happy-clappy TV advertising – actorly voiceovers oozing sincerity and shots of nicey-nicey advisers handing out financial sweeties. The reality for us ordinary customers is pin numbers, over-charging and calls to Delhi to speak to a man who says his name is Eric. The real money is made elsewhere.
While some bank staff (the disposable foot soldiers – Royal Bank of Scotland has made 36,000 of them redundant in the past five years) cash our cheques, the organisations themselves and their risk-takers operate on different streets, in different ways, and make telephone-numbers money.
We know that because we read of the banks' profits, their staff bonuses and the fancy cars and homes they buy with them. What most of us didn't know before 2007 was exactly how they made it. And neither did the Government. Like some corrupt Southern governor kept in office courtesy of subsidies from the local hoodlums, it took the money but didn't really want to know too much about how it was made. Best not to ask too closely.
But the banks over-reached themselves. They expanded too rapidly, and got their fingers into too many sweet pies. And in 2007 and 2008, their schemes began to unravel. We learnt about sub-prime mortgages, liars' loans, and derivatives where mad-money loans were carved up, repackaged, sold and re-sold so that any connection between borrower and the final lender was broken.
It sounds as crazy as tulip mania, but these, we were told, were the Masters of the Universe, super-clever people able to turn financial tap water into vintage wine, and our cash deposits and banked salaries into untold billions.
But how smart were they? We gradually discovered that, in the world of banking, there were entire continents of incompetence. An early example: banks' statistical modelling assured them that a 20 per cent fall in US house prices was a once in every three billion year event. A recent one: the routine software upgrade that was turned, by NatWest, RBS, and Ulster Bank into a financial hiatus affecting millions.
We learnt more. We always knew some of these pinstriped goodfellas got hurt amid the rivalries and turf wars. Now we learnt that the mayhem they created, the speculation they sprayed around, could catch entire populations in its crossfire. In the words of George Osborne on Thursday: "The failures in our banks and financial system have cost the country billions and put thousands out of work."
And, as we daily absorbed the cost of this, we learnt about mis-selling of personal loan insurance. Hundreds of thousands were sold these policies, which were little more than a means for banks to impose a tax on their customers when they were at their most needy. So now we knew they were not only greedy and sometimes incompetent, but often up to sharp practices. After all, customers are muppets, aren't they?
Then last week, with the revelations about their rigging of interest rates, we learnt they were dishonest as well. The Libor scandal (the technicalities of which are explained in our Q&A), came to light on Wednesday when Barclays was the first bank (of potentially 20) to be fined by US and UK regulators for attempting to rig a fundamental part of the world financial system for their own benefit.
The Libor is no small matter. It affects the cost of no less than $554trn (£353trn) in financial contracts around the world. Barclays' misconduct, according to Tracey McDermott, the acting director of enforcement and financial crime at the Financial Services Agency (FSA), was "serious, widespread, and extended over a number of years". The US regulator said Barclays co-ordinated with traders at other banks to make false submissions, and confirmation came from London that banks were acting in concert. Criminal investigations are now under way.
The day after the Libor shenanigans broke, there came news of a further racket: the rooking of small businesses via interest-rate swap arrangements. These are complicated derivatives products sold as protection – or to act as a hedge – against a rise in interest rates, without the customer fully grasping the risks. Banks have sold around 28,000 interest-rate protection products to customers since 2001, according to the FSA.
A survey by Bully Banks, which has been set up by alleged victims of swap mis-selling, found nearly three-quarters of its members claim to have been forced to buy a swap by their lending bank as a condition of their loan.
The MP for Aberconwy, Guto Bebb, has claimed thousands of businesses lost large amounts of money after being mis-sold the complex products by their banks.
Among the cases reported are that of Guardian Care Homes, responsible for 1,000 residents, which was sold two swaps worth £70m between 2007 and 2008. The firm said it was not properly informed the swaps could incur huge costs in the eventuality of interest rates falling – and both have already cost an additional £12m. In addition, Guardian, which employs more than 900 staff, claims that Barclays did not inform it that it would have to pay a £24m break fee if it wanted to exit the swaps. Guardian issued proceedings in the High Court against Barclays on 25 April. The bank denies wrongdoing.
And with these revelations is gone, for many a year, the reputation for trust on which the City was based. It's quite a thought that anyone dealing with a bank employee will now feel obliged to count their fingers after that closing handshake, and keep a lawyer on standby for the inevitable mis-selling claim.
If that seems an extreme view, try these comments for size: "systematic greed at the expense of financial integrity and stability", "excessive levels of compensation, shoddy treatment of customers, and a deceitful manipulation", "a massive cesspit" – the verdicts, respectively, of the Chancellor of the Exchequer, the Governor of the Bank of England, and the Secretary of State for Business.
And still, after all the bailouts, job losses and cuts to benefits, not a single banker has been prosecuted, not a change in their culture has occurred. Retail banking, it has turned out, is just a front for other, shadier business. It's hard not to be reminded of the old Chicago gang boss Dean O'Banion and his florist's shop on the corner of North State Street – all carnations out front, and shake-downs in the back.
Banking scandal Q&A
What is Libor?
Developed in the 1980s, Libor – formally the London inter-bank offered rate – is the average interest rate at which top banks say they lend to each other. It is fixed daily and is the world's most important benchmark for setting short-term interest rates, affecting $350 trillion (£220trn) of financial products worldwide. A multinational with a strong balance sheet would borrow at the Libor rate plus a small premium – so the higher that base Libor rate, the greater the cost of borrowing and vice versa.
How is it set?
Libor is set by the British Bankers Association (BBA). Every day just before 11am it asks banks on its panel the lowest rate at which they believe they would be able to borrow funds from other institutions at that time. Not all of the banks will be borrowing every day, so the Libor rate is based largely on perception. There are 16 banks on the panel and the top and bottom four submissions are discarded to provide an average of the middle eight. There is also Euribor, a benchmark derived from a panel of 57 European banks.
How can individual traders gain?
A "submitter" at each of the banks is responsible for filling in his or her institution's daily Libor rates to the BBA. At Barclays, the submitter was under pressure from traders in New York and London to fix the rate at a level that would benefit their own financial positions. Typically, this would have been artificially low, leaving them with less interest to pay on their transactions and masking the scale of the losses on their bad debts.
How does Libor affect you and me?
If a bank has a higher Libor rate, that cost will be passed on to customers via increased interest rates on mortgages or loan repayments for small businesses. If they borrow more cheaply from each other, they needn't offer such good returns to attract savings deposits.
How can one bank influence it?
Given the size of the financial transactions, the tiniest alteration in Libor can potentially be worth millions of pounds. If, as seems likely, several banks were involved, the Libor rate will have been dramatically altered. Barclays' traders have been linked to four other banks, and more than 20 other banks are being investigated by regulators worldwide.
What crimes may have been committed?
This is market manipulation, which could result in charges of fraud or false accounting. The Government has called in the fraud squad and is bringing Libor within more rigorous regulation. Ed Miliband, the Labour leader, has called for prosecutions. The Serious Fraud Office should have investigated this last summer, but decided not to because of budget limitations.
Why have there been no prosecutions so far?
This has been a long and complicated investigation. Barclays has simply settled early with its £291m in fines to the US and UK regulators, but we do not yet know if, as whistleblower, the bank is just a small part of the scandal. Prosecutions could still be years off.
Is it conceivable that Bob Diamond did not know of the rate-rigging?
Mr Diamond was in charge of the investment banking arm, Barclays Capital, between 2005 and 2009, the period under investigation. And he is generally credited for building that business up from scratch to one of the world's most well-oiled trading machines. The point is not whether he knew; it is that he should have known.
What lawsuits could banks now face, and who is bringing them?
Class action lawsuits are already being filed in the US by plaintiffs that held financial products that depended on Libor. Any lawsuits are likely to dwarf the fines Barclays has already paid. More suits are likely to follow.
What happens to the fines imposed by the regulators?
The FSA part of the fine, which is £59.5m, goes directly into its coffers to reduce the fees of its members. The £128.5m paid to the Commodities Futures Trading Commission goes to the US Treasury, while the US Justice Department's criminal division received £103m.
How damaging are these scandals to the reputation (and future business) of the City?
This is a worldwide problem, but traders in Wall Street and the Square Mile are undoubtedly at the heart of it. Mark Boleat, the City of London Corporation's policy boss, has warned that the scandal "plays into the hands of our critics both at home and abroad". Banks are likely to face renewed pressure to split their high-street and investment banking operations.
Bob diamond, family man
For most of his life, things have gone according to plan for the man who says he wakes each morning with a smile on his face – understandable, given his personal fortune of more than £100m. Robert "Bob" Diamond likes making money. His talent for transforming balance sheets has seen a remarkable rise from his beginnings as one of nine children born to teachers in Concord, Massachusetts. After a brief stint as an economics lecturer, he joined Morgan Stanley in 1979. It took him less than a decade to become a managing director. In 1996 Diamond moved to Barclays and by 2011 had risen to chief executive. Diamond remains one of the world's best-rewarded bankers – getting more than £20m last year alone.
Married to Jennifer for 29 years, he has two sons and a daughter. Diamond is not a socialite, preferring to put his energies into family life and his other passion – sport. Even the carpet in his office has a putting-green style hole cut into it – Diamond is a keen golfer.
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