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Issue #1560      15 August 2012

Culture & Life

A rotten apple or an infected garden?

It is now becoming clear that international banks have, in the pursuit of profit, been involved not only in reckless financial transactions but also in outright fraud. The manipulation of the London interbank lending rate (Libor), arguably the largest financial scam ever attempted, was not the handiwork of a few individuals operating within Barclays bank. It was a systemic fraud involving an international cartel of banks.

Marcus Agius.

Marcus Agius is a gardener. His passion for plants led him to the presidency of the Royal Botanic Gardens, Kew, which was founded in 1759 by Princess Augusta, mother of King George III, and which currently has over eight million specimens in its herbarium in London.

Agius was appointed in 2006 as the first non-executive director of the BBC, a keeper of the integrity of British broadcasting. That same year Agius was called to manage the rescue of Barclays bank, which was on the verge of bankruptcy due to irresponsible financial bets. Continuing the tradition of his father-in-law, Edmund de Rothschild, also a horticulture enthusiast and a prominent member of the family of financiers who made the City of London the reference point of global banking, Agius combined business management with philanthropy and moral preaching.

Held as a model of elegance and good manners, Agius often changed his tailored suits for khaki pants and a wicker hat to be photographed shaking hands with beneficiaries of Barclays’ assistance programs in slums around the world, thereby promoting “corporate social responsibility”.

When the global financial crisis erupted in 2008, Barclays was one of the few banks that did not need an official bailout, because Agius negotiated its partial sale to several Arab emirs. Explaining the causes of the global crisis, Agius said that “they saw so much money being made in investment banking and trading, they said: ‘I must have some of that’, and they just didn’t have the historical experience or the deep-down culture”.

“Unacceptable behaviour”

On July 2, the City woke up to the news of Agius’ resignation from all his public and private offices. “Unacceptable behaviour within the bank”, he explained, had been penalised with a record fine of US$455 million and resulted in “a devastating blow to its reputation”.

The “unacceptable behaviour” is nothing less than the largest financial fraud ever attempted: the manipulation of the Libor interest rate, a white-collar theft of billions of dollars that has duped governments around the world and ultimately impoverished millions of people who had never heard of Agius, Barclays or the City of London and just happened to have borrowed money from a bank.

After years of detective work, both in London and in New York, involving not just the financial regulators but also the FBI, Barclays became the first bank to be fined for its wrongdoings, but a dozen other big financial institutions are also being investigated. On top of the bulky fines, which in the case of Barclays amounted to around 10 percent of its profits of 2011, once the fraud is proven the participating banks are likely to be sued by their victims, which can mean huge class actions.

Bob Diamond, the chief executive of Barclays, could not claim ignorance of the illegal operations and was forced to resign and forfeit 20 million pounds in bonus payments. In spite of his resignation, Agius will lead the board in search of a replacement.

Libor is the average rate at which major banks in the British capital lend money to each other. Financial transactions worth over US$800 trillion, from governmental bonds to simple house mortgages, all are contracted regularly with interest rates based on Libor. A small variation up or down makes the balance between debtors and creditors oscillate in the millions. The euro area has its Euribor and Japanese finance its own index, but six decades after the end of the British Empire, Libor continues as the global benchmark.

The Libor manipulation makes the Madoff fraud on Wall Street or the manipulation of deficit numbers by the Greek government appear like minor misdemeanours, and some analysts are already talking about “the biggest scam in history”. The cheating happened over several years and the modus operandi was surprisingly simple.

Libor is calculated every day by order (and under the supervision) of the British Bankers’ Association, which was coincidentally chaired by Agius, until the scandal exploded. The daily number is averaged by the Thomson Reuters news agency, and it is not based on the actual operations of banks lending and borrowing to each other, but on the answers given by big banks to the question of what rate they would pay if they were to borrow money today.

Together with several similarly indebted big banks, Barclays manipulated Libor down with bogus offers. In some cases this was done to favour traders in the derivatives markets: “Dude. I owe you big time! Come over one day after work and I am opening a bottle of Bollinger [champagne],” says one of the interbank e-mails now offered as evidence. Most of the time Barclays artificially lowered the Libor rate to avoid having to pay high rates for its enormous debts. The British Parliament is now investigating how this fraud could be carried out unnoticed for several years, jeopardising the credibility of British banking.

The manipulation helped hide the real financial situation of Barclays and other heavily indebted large banks, making them appear more solid than they really are and easing the pressure for reform.

A week before the scandal, the Bank for International Settlements (BIS) warned in its annual report that “banks must adjust their balance sheets to reflect the real value of their assets and ensure a rapid recapitalisation” (an honest assessment which can be fatal for many institutions). The BIS, which is the central bank of central banks around the world, argues that “governments must reform the banking system and limit its size and importance” to ensure that in future the bankruptcy of a bank does not trigger a new financial crisis.

Chakravarthi Raghavan, Editor Emeritus of the SUNS bulletin in Geneva, sees nothing new here: the BIS “has identified these problems in the past and proposed remedies”. However, the medicine is never implemented because “the financial sector has captured the political process”.

The British Parliament must decide now if the Libor case is explained by the traditional metaphor of the rotten apple present in every basket, or is more like a fungus that has infected greenhouses massively ... carried around by the gardeners.

Third World Resurgence  

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