Like Lloyd Blankfein with the Abacus fiasco, and Jamie Dimon with "the whale trade," Barclays CEO Bob Diamond has an unparalleled opportunity to surprise us this week during his appearance before Parliament to explain the most recent financial scandal involving the systematic manipulation of LIBOR, the benchmark interbank lending rate upon which hundreds of trillions of dollars of financial transactions are priced, over several years. Will Diamond seize the opportunity missed by both Blankfein and Dimon to emerge as the first true financial statesman of the modern global banking crisis?
In his column this week, "Taking One for the Country," Tom Friedman describes how Chief Justice Roberts "surprised us" with the Supreme Court Decision on health care reform by doing the unexpected in our current culture of toxic partisanship and offering an example of true leadership that actually puts the country's interests ahead of politics.
We need a banking leader to do the same right now, to put the vital interests of the world economy above the parochial interests of bankers and their toxic entitlement culture. Unfortunately, Diamond's recent letter to Member of Parliament and Chairman of the Treasury Select Committee Andrew Tyrie suggests there will be no such surprise.
Before I turn to the letter, it is important that I underscore the importance of this scandal.
LIBOR has been called "the highway of finance" because it serves as the universal interbank benchmark interest rate used to price cash instruments in the real economy (deposits and loans) and short- and long-dated derivatives, which serve as the critical reference for the cost of credit in the capital markets and the cost of hedging (and speculating) in equities, commodities, and foreign exchange. The intentional and systematic manipulation of LIBOR by not just one bank, but by a consortium of banks as is alleged, represents a brazen act of fraud and theft. The abstract nature of the fraud, in this case through manipulating rates affecting millions of transactions the perpetrators will never know or see, reveals both the cynicism and psychopathology of those committing the fraud.
To paraphrase a quote I heard from Wes Jackson, the source of which is unknown:
Abstraction without the particular becomes the demonic.
Intentionally and systematically undermining trust in the banking system is indeed demonic. Yet of course this is the pattern we have seen, accelerating into the crescendo of financial collapse, now morphed into what looks increasingly like depression across much of Europe, and stagnation at best in much of the rest of the world for years to come.
One sentence in Diamond's letter to Tyrie tells me no "surprise" is in the offing. After explaining that there were two issues related to the LIBOR setting scandal, Diamond implores, "It is vital to look at them separately as they are wholly unrelated."
The first issue involves fourteen (no rogue trader this time) Eurodollar traders who were merely enriching themselves by stealing lots of pennies from faceless victims they assumed would never notice. The second issue involves the material misstatement of the bank's actual funding costs at the height of the financial crisis to protect the bank because everyone else was doing it, nicely documented in an email from one of Barclay's offending parties to his boss: "I disagree with this approach as you are well aware. I will be contributing rates which are nowhere near the clearing rates for unsecured cash and therefore will not be posting honest prices."
Diamond's plea to look at these issues separately because they are "wholly unrelated" proves he's not likely to "surprise us" with his courageous leadership and financial statesmanship. I would suggest not only are these two issues wholly related, they are also directly related to the long list of ethical and legal lapses that has come to define modern banking in a trading-driven culture totally disconnected from the true purpose of banking as a profession in service of the needs of the real economy.
Perhaps the lowly Eurodollar traders well down the food chain were inspired by watching Bob Diamond himself cash in on a $26 million personal windfall on the sale of Barclays Global Investors (BGI) to Blackrock in 2009. With an added title of Chairman of the internal asset management division while being paid handsomely to run the investment bank, Diamond somehow convinced himself and his board that he was entitled to this windfall (pennies in the scheme of the $13.5 billion sale) for serving as "Chairman" of an internal division. Despite obvious conflicts of interest with Barclays' shareholders and a sale that was done out of weakness from mistakes committed on Diamond's watch and that would harm the quality of earnings going forward, his windfall apparently raised no red flags. The Eurodollar traders no doubt marveled at their boss's chutzpah for pulling this one over on his compliant or inept board and passive shareholders, so why not help themselves to far less through a little harmless manipulation of LIBOR that no one will ever miss?
Here's what I'd like to hear from Bob Diamond before the Members of Parliament on Wednesday. But let's not hold our breath.
Ladies and Gentlemen,
I come before you today to speak the truth. I am a trader and a leader. Today, history demands that I become a financial statesman, a role for which, as a trader, I'm not naturally suited. Nevertheless, it is abundantly clear to me, as no doubt it is to you all, that the trading culture I represent has run amok and is a proven and ongoing threat to the global economy and to democracy itself. I do not mean to implicate all traders; many do honest and valuable work. But today I must stand apart from individual examples and look holistically at the entirety of the culture that has come to dominate global banking in what for a time felt like progress. For the good of society, this culture cannot stand.
The willful manipulation of LIBOR for the benefit of a group of Eurodollar traders and again to deceive the market (with respect to Barclay's funding abilities at a time of historic stress in the markets) were both fraudulent acts for which there is no excuse. That Barclays itself became vulnerable to the risk of a liquidity crisis and felt it needed to deceive the market about its funding to protect the bank is evidence of the danger the trading culture we helped promote. Barclays has and will continue to fully cooperate with global authorities to allow the investigation to lead wherever the evidence takes it.
Last evening, I tendered my resignation to the Board of Barclays. After supporting the transition at Barclays, I offer my full time services to you to help design the radical structural reform so desperately needed in the global banking sector. I believe I am uniquely qualified to both design meaningful reform and to help forge the critical consensus for such reform in both London and Washington.
As a trader who now feels the call of financial statesmanship on behalf of society, I can assure you that reform will involve not just a ring fence around retail banking as called for by the Vickers Commission, but the complete separation of a banking culture in government-insured depository institutions apart from well-capitalized trading firms that operate in the global capital markets. We must limit the scale and complexity of such trading firms and give serious consideration to whether they are appropriate for public ownership, given how broken public company governance has become.
I have many ideas on how to restructure this industry to serve the public interest and hope you will accept my offer to help lead such efforts at this critical time in history for Europe and for the world. It would be my privilege and honor to serve.
Thank you for allowing me a hearing today.
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