The House of Commons Treasury Select Committee has lambasted the Bank of England for its "naive" response to the Libor rate-fixing scandal and criticised the Governor, Sir Mervyn King, for intervening to force out Bob Diamond as Barclays' chief executive.
In their report on the scandal, released today, the committee of MPs noted that although officials at Threadneedle Street were well aware of the temptation for banks to submit false borrowing rates during the 2008 financial crisis, they failed to follow up on concerns that this was taking place.
"This suggests a naivety on the part of the Bank of England. They were certainly relatively inactive," said the committee. In the wake of Barclays' £290m fine in June for attempting to fix the key global interest rate, Sir Mervyn made it clear to Barclays' chairman, Marcus Agius, that Mr Diamond needed to resign. But the committee said Sir Mervyn had overreached himself.
"The Governor's involvement is difficult to justify," it said. "Any attempt to discuss Mr Diamond's future as Barclays CEO should have come from the Financial Services Authority (FSA) and not the Governor."
The committee was also critical of the performance of the FSA in failing to detect Barclays' attempted rate- rigging – which had been going on since 2005 – sooner. It described this as "far more serious" than the shortcomings at the Bank of England since the FSA was the primary prudential regulator.
It criticised Sir Mervyn and the FSA's chairman, Lord Turner, for combining to eject Mr Diamond from Barclays only after an outcry from "public, media and Parliamentary opinion".
The committee criticised senior managers at Barclays, saying they should have known about attempted rate fixing by their traders and acted to prevent it.
"This attempted manipulation of Libor should not be dismissed as being only the behaviour of a small group of rogue traders. There was something deeply wrong with the culture of Barclays," the report added.
The report promoted a strong response from Mr Diamond, who last night said he "took particular issue with the attacks on Barclays' culture and character", noting Barclays' co-operation with investigations into Libor manipulation by banks.
The MPs also said they "did not accept" Mr Diamond's evidence on 4 July when he told them he was unaware of the FSA's concerns about the corporate culture at the bank. Mr Diamond last night said: " I answered every question that was put to me to me truthfully, candidly and based on information available to me. I categorically refute any suggestion to the contrary."
Q&A: Where the blame lies
Q Who comes out worst from this report?
The committee lays into all the actors in the Libor drama with equal wrath. Barclays' management takes a battering for presiding over a toxic culture. It stops only slightly short of calling Bob Diamond a liar. But the Financial Services Authority is also criticised for not picking up on Barclays' malfeasance sooner. And the committee uses the opportunity to step up its long-standing squabble with the Bank of England and its Governor, Sir Mervyn King.
Q What squabble is that?
The committee said earlier this year that the Bank's governance framework needs to be modernised, especially as it is preparing to take on broad new regulatory powers from next year. But Sir Mervyn fought against reform behind the scenes. And the Chancellor, George Osborne, sided with the Governor, omitting the kind of governance shake-up that the committee called for out of the latest financial reform bill. The committee sees the Governor's role in ejecting Bob Diamond from Barclays as a clear example of why the Bank requires rigorous new oversight structures and it has decided to push the reform case strongly in this report.
Q Does this damage Paul Tucker's hopes of succeeding Sir Mervyn?
The committee criticises Mr Tucker for failing to take a note of his phone conversation with Mr Diamond in October 2008. But it does not query Mr Tucker's denial that he ever gave a green light for Barclays to manipulate its Libor submissions. The committee also suggests Barclays may have cynically released Mr Diamond's version of the conversation to distract public attention at the height of the uproar. That might have kept Mr Tucker's hopes of the Governorship alive, although he faces stiff competition from another player caught up in the Libor case, Adair Turner, chairman the Financial Services Authority.