In truth, it has been Albion's summer to forget. Even as London basked in a successful Olympic Games, the City of London--their Wall Street--has suffered global attention of an altogether different sort.
Beginning in June, with the news that the British bank Barclays had agreed to pay a half-billion-dollar fine for manipulating the LIBOR benchmark interest rate, the news has only gotten worse from one week to the next.
LIBOR -- the London Interbank Offered Rate -- actually refers to a number of interest rates along a yield curve calculated daily by the British Bankers Association (BBA). Each morning, a panel of up to 18 banks each submit interest rates at which they believe they could borrow a substantial amount of money from other banks for differing time periods -- a 30-day rate, a 60-day rate, a one-year rate, and so forth. Much like a panel of Olympic gymnastics judges in years gone by, the BBA tosses out the highest and lowest rates, and takes an average of those in the middle that become that day's LIBOR rates.
Barclays confessed to British bank regulators that over a period of years beginning in 2007, its traders had not submitted rates in good faith, but rather -- like the East German judges of Olympics past -- they had deliberately sought to skew the results, to manipulate LIBOR in directions that would benefit their trading positions. While at first it was unclear how much damage Barclays could have inflicted -- after all, Barclays was but one participant on the LIBOR panel -- in the ensuing weeks other global bank members of the panel have come forward to admit that their traders conspired with Barclays to tilt the playing field in their favor.
To date, the list of banks who have stepped forward includes names that have become all too familiar for their participation in financial misdeeds over the course of the last half-decade: UBS, Deutsche Bank, Royal Bank of Scotland, Citigroup, JPMorgan, Credit Suisse and Bank of America. And the list goes on.
And then it got worse.
As July rolled into August, two of the most venerable British banks, Hong Kong Shanghai Bank (HSBC) and Standard Chartered, were accused by U.S. investigators and bank regulators of aiding and abetting global money laundering schemes. HSBC and Standard Chartered are particularly important institutions in British history. Each were created under charters granted by Queen Victoria, to create institutions to finance the growth and development of the Empire. HSBC was founded to fund growing British trade and investment in China, while Standard Chartered's mission focused on British colonies from East Asia to South Africa.
The first shoe to drop was HSBC, which was accused of complicity in $15 billion of money laundering and illicit transactions for Mexican drug cartels, as well as Russian and other international criminal groups. Then, before the HSBC story could fully sink in, Standard Chartered was accused of complicity in laundering a quarter of a trillion dollars of Iranian assets, and indirectly abetting terrorist activity.
For Americans, it is difficult to understand the depth of betrayal represented by the malfeasance at HSBC and Standard Chartered. America has always been suspicious of its banks, and our tradition is one of fear -- if not conspiracy theories -- of the power of our banks over our government, rather than the other way around.
In Britain, the anger at Barclays CEO Bob Diamond and before him Royal Bank of Scotland CEO Fred Goodwin reflected outrage at their failed stewardship of important national institution. Back here in the colonies, both the outrage and the treatment of Bank CEOs have been notably different. Regulators and the Justice Department have treated our top banks -- now comprising JPMorgan, Citi, BofA, Wells Fargo, Morgan Stanley and Goldman -- with kid gloves. Just this week, federal judge William Pauley grudgingly signed off on a $4.8 million fine for Morgan Stanley, for its part in an electricity price-fixing scheme that cost New York consumers $300 million. Morgan Stanley earned on the deal was $21.6 million, and they admitted no wrongdoing in the plea agreement.
The Morgan Stanley settlement -- representing less than 25 percent of their take -- simply illustrated the profitability of behaving badly, and came the same week that the U.S. Justice Department decision not to prosecute Goldman Sachs for its conduct in shorting the housing market during the 2008 housing market collapse.
It should be conventional wisdom by now that regulators do not have the capacity to effectively counter the power of our dominant banks recalled the observation of one Wall Street trader that he and his brethren would not be deterred by fines -- which are few and far between. Only arrests would do the trick, as every trader's greatest fear was that their mother would see them frog-marched off to jail on television.
In the post-2008 world, much discussion of banking in the U.S. has focused on the reintroduction of the Glass-Steagall restrictions that separated tradition commercial banking services -- taking deposits and lending money -- from investment banking and proprietary trading. Sandy Weill -- the Godfather of the modern mega-banks who orchestrated the financial reforms that ended the Glass-Steagall restrictions -- made waves in July when he recanted his views and called for the reimposition of Glass-Steagall. Weill's view reflects that of many on the right and the left who share the view of Paul Ryan, who stated succinctly at a town hall meeting in May, "If you're a bank and you want to operate like some non-bank entity like a hedge fund, then don't be a bank. Don't let banks use their customers money to do anything other than traditional banking."
Writing in the New York Times, Obama Car Tsar and former Lazard Frere head Steven Rattner joined the finance industry swift reply to Weill's treachery, arguing essentially that such banking activities should not be restricted, just regulated better, and that Glass-Steagall restrictions would put American banking out of synch with the rest of the world, where such restrictions do not exist. But in the rest of the world, international banks have traditionally been national banks, with governance and management closely aligned with national leadership.
American banking is unique, and is a reflection of the freer world of American capitalism. As the old saying goes, in Germany, what isn't legal is illegal, while in America what isn't illegal is legal. Glass-Steagall was important in America specifically because of the lack of essential trust and interconnection between the banks and the political sector, and the apparently reasonable concern that American banks could not be trusted as conservative stewards of public deposits.
Unlike European and Asian banks -- whose roles and function in the world have traditionally been closely linked to the nations whose interest they serve, American banks are private organization that pursue their own interests and make no pretense of advancing nationalist interests -- other than in acknowledging the essential role of banking to the functioning of the private economy. Accordingly, America has far more banks and resolution systems that presume that banks will fail as a matter of course. Or as Paul Ryan noted as his preamble to the comment above, "We should make sure you can't get too big where you're going to become too big to fail and trigger a bailout, and if you take risky behavior then you go into bankruptcy and we open up the bankruptcy laws to allow them to go into bankruptcy."
As bad as the LIBOR scandal has been, the HSBC and Standard Chartered revelations are in their way deeper indictments of the state of international banking. HSBC and Standard Chartered are culturally rooted in the British Empire. As created by Queen Victoria, they were not simply institutions regulated by the state, but were arms of the state, chartered as essential tools of state policy.
Over the past decades, the dominance of the U.S. Federal Reserve Bank -- combined with the failures of the European Union to develop effective, unified bank regulation -- have led to a creeping Americanization of global finance. International banks, like Barclays, have found themselves run by American or American-trained chief executives, and their cultures have migrated toward the those of their large American counterparts, where trading and investment banking -- and the higher compensation that those activities can generate -- have undermined the traditional banking values focused on credit and long-term relationships.
Internal emails at Standard Chartered published in the New York Times provide a hint at the awareness of bank managers of their own activities and the reputational risks that they were taking. According to one email, the Standard Chartered chief executive for American activities warned London that the Iranian activities had "the potential to cause very serious or even catastrophic reputational damage to the group." The response was telling: "Who are you to tell us, the rest of the world, that we're not going to deal with Iranians."
Back in the day, such a response might well have reflected directives from Whitehall that Britain was supportive of Iranian relations, and Standard Chartered need not curtail its activities in deference to the political priorities of their American cousins. But those days are long past. Like Barclays and the list of other LIBOR manipulators, Standard Chartered had no such defense. In today's world, each bank is acting only on their own account, with traders focused on their own bonuses, and with little regard for the impact of their activities on the world around them.
The devolution of the venerable Victorian banks from instruments of the British state to instruments of individual self-interest is unfortunate, if not tragic. Those banks have lost their mission, their purpose and the tether to the national government that they were created to serve. Queen Victoria would not be pleased
But the problems are not Britain's alone. It appears that we may be migrating toward the worst of both worlds. Even as global banks are loosening their traditional ties to their political masters, and migrating into trading activities delinked from their traditional banking focus in pursuit of greater compensation, our banks are increasingly tied to the political system. But here, it is not the political system that guides the banks toward areas of strategic national interest, but rather the other way around. Through our open system of political funding, political influence increasingly appears to flow from the banks to the politicians, and from there up the latter of the political and regulatory apparatus.