Last week, Gillian Tett of the Financial Times wrote how five years previously, she and her fellow journalists were intimidated into backing off of a huge story about banks manipulating LIBOR. This is the London Interbank Offered Rate set by a poll of leading banks to determine the benchmark interest rate referenced by many home mortgage loans, floating rate notes, collateralized debt obligations, and many other financial instruments:
"At the time, this sparked furious criticism from the British Bankers' Association, as well as big banks such as Barclays; the word "scaremongering" was used. But now we know that, amid the blustering from the BBA, the reality was worse than we thought. As emails released by the UK Financial Services Authority show, some Barclays traders were engaged in a constant and pervasive attempt to rig the Libor market from 2006 on, with the encouragement of more senior managers. And the British bank may not have been alone." ("LIBOR Affair Shows Banking's Big Conceit," June 28, 2012.)
At the heart of the allegations is what appears to be a blasé criminal conspiracy within Barclays. Moreover, Tett is correct. Barclays is far from alone.
Unfortunately, the intimidation was a success. The BBA and Barclays chose their word carefully, because accusing journalists of "scaremongering" suggests they are irresponsible sensationalist hacks. In essence, through lies and intimidation, they threatened to ruin careers.
The Financial Times backed off. As a result, the best coverage of the ongoing scandal came from a controversial blog with mostly anonymous writers called ZeroHedge. It pounded on the story harder than mainstream financial media. Not only are other banks implicated in the scandal, the Bank of England, a bank regulator, is also implicated. Update: The Wall Street Journal's Carrick Mollenkamp (now with Thomson Reuters) and Mark Whitehouse also did exemplary work on LIBOR manipulation. Both followed the story from the early days of the crisis.
The Future of Finance
In December 2009, I participated in the Wall Street Journal's Future of Finance Initiative in England along with Alistair Darling, then Britain's Chancellor of the Exchequer, and Robert ("Bob") E. Diamond, Jr., then President of Barclays PLC among others. The Wall Street Journal wrote a summary of the conference highlights. Allow me to highlight some things it missed.
Alistair Darling, Chancellor of the Exchequer, spoke on the opening evening. I asked him why massive financial fraud remained unaddressed. Darling appeared momentarily confused and seemed to suggest this was exclusively a U.S. problem to be handled by the courts. I pushed back on this notion. By the time one needs a lawyer, it is too late. I noted that we, the middle aged financiers in the room, are responsible for taking action. If we don't face this issue head on, we will never restore trust in the financial system.
That was the last time the word "fraud" was mentioned at the conference, and my question and Darling's answer and my rebuttal were not reported.
Bob Diamond defended financial innovation saying there is a real purpose for structuring credit for pension funds. He was probably unaware that state pension funds in the United States were damaged by the unintended consequences of an "AAA" rated structured credit product. The pension funds were wise enough to avoid investing in the product, yet as I explained in my February 2007 letter to the Securities and Exchange Commission, large fixed income pension funds were unintentionally harmed by the market distortions caused by this "financial innovation."
This conference took place just over one year after the global financial meltdown. Diamond didn't address malfeasance much less fraud. For example, he conveniently omitted Barclays' business relationship with Bear Stearns's hedge funds (Barclays sued over hundreds of millions in losses and later dropped the suit.) -- among other unrelated problematic issues -- and he was mum about Barclays' LIBOR manipulation.
Today, Bob Diamond, CEO of Barclays, announced his resignation in the midst of the LIBOR scandal. There is speculation that Diamond was pressured to resign by the Bank of England after Diamond's bellicose threats to expose embarrassing details about his interactions with bank regulators.
Threats are more effective against respected journalists whose careers you are threatening to ruin than against complicit regulators that can ruin yours.
How Many Billions in Unrecognized Losses?
So how did the "Future of Finance" work out for the British attendees? It worked out much as it had in the past. Malfeasance remains unchecked, unless something like the LIBOR scandal blows up. This isn't the only problem with the British banks. Like their U.S. and European counterparties, the balance sheets need a thorough going-over to determine the true extent of the global financial debacle. The banks are not just lying about LIBOR.
Endnote: The title quote is from A Soldier's Way, by Colin L. Powell, 1995, written years before his United Nations speech on Iraq, which he now calls a "blot" on his record.
General Response to Anonymous Commenters:
I can see this post got to a couple of anonymous commenters who attempt to discredit and dismiss the message. I stand behind my assertion of widespread massive fraud in the financial system, and it has remained unpunished and unchecked. My record in bringing problems to the fore, in advance, is a long one, and it's well documented. My web site's news section includes my writing in professional journals on these topics since the inception of my consulting business in 2003. Prior to that I worked on Wall Street for 18 years. I've also been widely quoted in the mainstream financial press. My professional books pre-date that. My book, CREDIT DERIVATIVES, was published in 1998 (Wiley), and COLLATERALIZED DEBT OBLIGATIONS & STRUCTURED FINANCE, in 2003 and updated in 2008 (Wiley). I documented explicit warnings and examples about abuse. I've lent my time and expertise to public forums in Washington and professional organizations. Moreover, I've put examples and facts in the public domain based on analysis of deals prior to the financial meltdown.
The difficulty that regulators and Congress have had in dismissing my views is that I am a recognized expert in this field who warned in advance. My work has been used and is well-known in this niche area of finance.
The fact that regulators and elected officials have failed us is obvious. But there are professionals who lent their time and expertise to avert disaster, and despite the misinformation disseminated by those attempting to discourage it, will continue to stand firm.
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