Consensus breaks out between Labour and Conservatives over rate rigging inquiry

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By Bob Duncan

Chancellor of the Exchequer George Osborne has climbed down from claims that shadow chancellor Ed Balls was personally involved in the Libor scandal.

The apparent U-turn by Mr Osborne preceded a break out of consensus between the two political rivals which has ended with Labour agreeing to co-operate with a parliamentary inquiry into the affair.

The agreement followed an angry debate in the Westminster parliament, which saw the UK government reject calls for a judicial enquiry into banking standards, MPs voting instead to establish a joint parliamentary committee.

The Labour party had originally opposed the Tory proposal, and called for a judge-led inquiry, similar to the Leveson inquiry into press standards.  However, this was defeated by 320 votes to 239, before MPs then backed the government’s preferred option of an inquiry by a joint committee of MPs and peers.

MPs upheld calls for a parliamentary investigation with a government majority of 104, although Labour said it would continue to push for a public inquiry.

The committee will investigate “professional standards in the banking industry” including the manipulation of a key inter-bank borrowing rate by Barclays traders – Libor – for which it was recently fined £290m, leading to the resignation of three of the bank’s most senior employees.

The inquiry will be chaired by Conservative MP Andrew Tyrie, chairman of the treasury select committee, who told MPs that it was essential that the enquiry commanded cross-party support and reported quickly.  Mr Tyrie stated that he would only agree to chair the inquiry if it commanded the support of both front benches.

The debate saw angry exchanges between George Osborne and Ed Balls, with Mr Balls repeatedly demanding that the chancellor apologise to him after Mr Osborne claimed Mr Balls had been involved in the manipulation of the LIBOR rate.

In an interview with the Spectator yesterday, Mr Osborne said ministers in Gordon Brown’s government had “questions to answer” over allegations from Barclays bank that “senior Whitehall figures” had put pressure on them to post artificially low Libor rates during the credit crunch.

At the start of the Commons debate, Mr Osborne urged the shadow chancellor to “explain what Labour’s involvement was, who were the ministers, who had the conversation, who were the senior figures?”.

Mr Balls responded by calling on the Chancellor to withdraw the “false, personal accusations”, describing them as “cheap, partisan and desperate”.

After the debate, the Chancellor’s aides told the BBC that Mr Osborne had in fact been misquoted in the Spectator article and he accepted that it was not Mr Balls who was the senior Whitehall source referred to in the phone conversations between Bob Diamond and Paul Tucker.

After the vote Mr Balls said Labour respected the will of Parliament and would cooperate with the enquiry, but said they had concerns over the scope and membership of the proposed committee and argued that its remit was too “narrow”.

He told MPs after the vote, “The prime minister and the chancellor have made a very grave error of judgement and, any time any future scandals emerge, people will ask why are we not having the full independent inquiry that this country needs?”

Some hours before the debate, rating agencies Moody’s and Standard & Poor’s had lowered their outlook on Barclays from stable to negative.  Moody’s said shareholder and political pressure was creating uncertainty about the bank’s future, while S&P said the emergence of “weak business practices” had hit the company’s prospects.

Moody’s also stated that pressure on the bank could force it to move away from investment banking, adding that “Although this could have potentially positive implications over the longer term, the uncertainty surrounding such a change in direction is credit negative in the short term”.

The change comes a day after ex-Barclays chief executive Bob Diamond told the treasury select committee the rate fixing was “reprehensible”.   Commenting on the evidence given by Mr Diamond, committee member David Ruffley said: “Either he was complicit or, frankly, incompetent”.

Andrew Tyrie, who has been asked to lead the parliamentary inquiry, and who had chaired the select committee, said he was sceptical about some of what he heard, describing Mr Diamond’s evidence “implausible”.

He said after the hearing: “We learned that Bob Diamond says he didn’t know anything about this until about a month ago, which I find rather surprising.

“I think, cumulatively, the whole package looks somewhat implausible.  And if it is plausible, it’s only because there is something wrong with the culture of Barclays and, of course, it’s the culture that needs to be put right.”

Paul Tucker, the Bank of England’s deputy governor, will give evidence to the committee next week.  Mr Tucker requested he be allowed to appear after Barclays released an internal memo describing a phone call between Mr Tucker and Bob Diamond.

Mr Diamond said that, during a telephone conversation in October 2008, Mr Tucker told him “senior figures within Whitehall” were concerned that Barclays was setting its Libor rate higher than some other major banks.

Subsequently, the Libor borrowing rates submitted by Barclays fell, potentially understating the extent of the bank’s borrowing costs.

Mr Diamond maintains that he did not view his conversation with Mr Tucker as an instruction to change the bank’s rates submissions.

However, he said his chief operating officer Jerry del Missier, who resigned on Tuesday along with Mr Diamond, had misunderstood the message from the Bank, directing traders to take actions to lower Barclays’ Libor rates.

The Financial Services Authority has already investigated Mr del Missier’s actions, and have decided take no further action against him.

The SNP has expressed regret that calls for an independent judge-led public inquiry into the standards in the banking industry have been rejected this afternoon, but said the joint parliamentary committee would now be judged on the answers it provided.

SNP Treasury spokesperson Stewart Hosie MP offered his full support to the joint parliamentary committee that will now be established and called for the Labour party to co-operate to make the inquiry as effective as possible.

Mr Hosie – a member of the Treasury Select Committee – said: “It is disappointing that the UK Government chose not to support a full judicial inquiry, but getting to the bottom of this rate-rigging scandal is more important than the mechanism we use to do so. The joint parliamentary inquiry will now be judged on the answers that it provides.

“Given we are going down the route of a parliamentary inquiry, we must work together to ensure it is as effective as possible and thoroughly tackles the issues in the banking sector. It must have a broad remit, wide membership and full cross party co-operation. I urge the Labour party to end the wrangling over process and focus on the investigation.”