By Martin Kelly
Rigging interest rates and miss-selling financial products that led to hikes in mortgages, increased loan repayments and businesses closing down – the banking crisis is back with a vengeance.
Last week no-one had heard of LIBOR, now everyone knows about the City of London based interest rate that banks use in order to set the rate at which they lend to one another.
Barclays Chairman Marcus Agius, who has resigned today just days before appearing in front of a select committee of MPs, is the first Corporate victim of the scandal, and as with every scandal there’s bound to be political fall-out.
‘What goes around comes around’ the old saying goes, and make no mistake this is a scandal that is very firmly laid at the feet of Gordon Brown and Alistair Darling. The men who apparently saved the banks in 2008.
Now we know that from 2005 through to 2008 and possibly even into 2009, UK banks were conspiring to rig the LIBOR interest rate. ‘Greed is good’ said Gordon Gekko in the iconic movie Wall Street and, if emails promising bottles of Bollinger for favours are to be believed, greed was indeed good for some.
However, missing from the scandal thus far is the role, or lack thereof, played by the UK Labour Government at the time. Gordon Brown was both Chancellor and Prime Minister at different periods when the scandal was taking place. When Brown eventually became PM his replacement was Alistair Darling.
Both men were central to the catastrophe that was the UK banking system from 2008 onwards – first Northern Rock, then Bradford and Bingley, RBS and HBOS all suffered as the casino bankers lost their, or rather our, shirt.
Brown de-regulated to such a degree that banks operated in a kind of financial anarchy that saw once proud institutions brought to their knees. Initially all looked well as Brown lauded the casino capitalists, describing them as his “inspiration”.
In 2006 Brown attended a dinner and gave a speech in which he publicly praised them. “I congratulate you” said Brown “on these remarkable achievements, an era that history will record as the beginning of a new golden age for the City of London.”
This glorious success, Brown added, was achieved through “a deep and abiding belief in open markets”.
Brown had good reason to laud the bankers. The financial success story was underpinning UK public spending. Not only did public sector employment increase by 750,000 between 1999 and 2008, but from 2000 or so onwards, financial services’ share of UK GDP increased dramatically.
However, by 2007 it was starting to unravel. Northern Rock was the first to succumb and UK taxpayers’ cash saved the north of England institution. When Barclays and RBS both vied for ABN-AMRO and the scourge of toxic debts was about to be unleashed, it was the beginning of the end.
It all began of course when Gordon Brown removed regulation of banking from the Bank of England and handed it to the FSA, an organisation he himself helped create. Light touch legislation was what Brown desired and no touch regulation was what resulted.
As far as LIBOR was concerned what legislation there was didn’t even cover this key banking interest rate. Regulation of LIBOR was left to the British Bankers’ Association and there was no fear of conviction for those who transgressed the gentleman’s agreements that passed for rules.
If one had to design a system ripe for corruption and certain to lead to catastrophe then this was it – Global Gordon had created a monster.
We are now faced with what is possibly the biggest scandal in banking history and the revelations now coming out suggests that collateral damage may be considerable.
There are now claims by Barclay’s managers that they were acting under instruction from the Bank of England when seeking to suppress LIBOR in 2008. A phone call from BoE deputy Paul Tucker to Bob Diamond is said to have led to manager’s believing they had BoE approval.
This was at the height of the banking crisis and Diamond, at the time, headed the department responsible for the rigging scandal – Barclays Capital.
At around this time interests rates had began to spike as banks became reluctant to lend to one another. However, they very quickly began to drop, something that caused suspicion amongst many analysts and was echoed by the Wall Street Journal (WSJ).
The WSJ also reported as early as March 2011 that investigations were already underway in the USA over suspicions that the LIBOR rate had been illegally manipulated at this time.
The City watchdog, the Financial Services Authority (FSA), alluded to the Tucker/Diamond phone call in its recent judgment against Barclays, but it concluded that Mr Tucker had issued no instruction that Barclays should lie about its borrowing costs.
However others have speculated that the Labour government under Gordon Brown may have applied pressure in order to persuade UK banks to lower the LIBOR and thus stave off a surge in interests rates, which could have triggered a recession.
Adding to the ‘smoking gun’, French Establishment paper Le Figaro claimed on 25th March 2011 that “the [UK] authorities suspect that key traders [at Barclays Capital] used Treasury information via the main branch dealing with the UK Treasury”.
If true, who would have had access to Treasury knowledge and how would it have been passed to traders at Barclays Capital and with whose approval?
Whatever the truth, in 2008 Barclays’ managers sought to manipulate rates in order to bring down LIBOR – and by all accounts they succeeded.
Not long afterwards Brown and Darling handed the UK banking industry one trillion pounds obtained by putting the UK into hock – a no strings attached deal that left many open mouthed and the consequences of which are being felt now with banks refusing to lend to businesses.
Whether Labour Ministers applied pressure to lower interest rates or whether they were unaware it was happening, one thing is certain. The environment that allowed morally repugnant practices to become institutionally accepted was created by first Gordon Brown then Alistair Darling.
When, in 2010 during the general election campaign, Brown was asked by Channel 4’s John Snow to condemn Diamond who had been described as the “unacceptable face of banking” after receiving a reported £63 million bonus, he refused saying:
“When you look at banking revenues, capital has got to be increased there’s no certainty on that.”
“…They [banks] have been undercapitalised, and they have to be re-capitalised”
Yesterday the SNP, keen no doubt to make political capital out of the situation, published a list of ten questions they suggest might clarify Labour’s role in this latest banking mess.
The sad thing is that, despite Labour’s very clear culpability in this whole sorry episode, there are few – if any – Scottish journalists who will pursue Gordon Brown and Alistair Darling.
Here are the SNP’s ten questions:
- 1. During the former Chancellor’s discussions with various banks including Barclays and RBS, did the subject of funding rates for RBS arise and did Mr Darling receive a briefing on this subject from officials?
- 2. Did the former Prime Minister or Chancellor ask whether there was oversight of the arrangements around LIBOR given the increasing relevance of liquidity and the obvious self-interest of banks during the financial crisis?
- 3. When was the former Chancellor first informed of the LIBOR fixing allegations and by whom? What was his immediate response?
- 4. Do the former Prime Minister, Chancellor and UK Economic Secretary consider the fixing of LIBOR to have potentially impacted the ability of UK banks to remain solvent during the financial crisis? If so, was this a consideration in their silence on the matter?
- 5. Did they receive official advice on the relevance of transparency around such a serious investigation in the context of wider allegations of malpractice and mismanagement in UK banking?
- 6. Why did the former Chancellor not make a statement to Parliament on these serious allegations as soon as they became known or at least at some point during his tenure in office?
- 7. Does the former Chancellor believe it would have been appropriate in the context of substantial malpractice in the banking sector to at least make Parliament aware of the LIBOR fixing investigation?
- 8. Do the former Prime Minister, Chancellor and Economic Secretary believe it was appropriate for such an important financial rate to be set by the banks without proper supervision particularly in the context of a banking crisis?
- 9. The Economic Secretary is responsible within HMT for banking, finance and financial regulation. Did the former Economic Secretary attend any discussions or briefings with regulators, officials or banking representatives which covered the subject of LIBOR?
- 10. Will Ed Miliband compel the former Labour ministers to give come clean on what they knew and when?