Thursday, July 12 2012

I wrote last week about the rigging of the key interest rate, Libor, by bank traders, and of the role played by Barclays which was fined a record £290 million for conspiracy to artificially fix rates on the wholesale money markets. Since then, the fallout from this scandal has been widespread and far-reaching.

For a start, furious Barclays’ shareholders are demanding that the bank strips former chief executive Bob Diamond, who has resigned, of his entitlement to millions of pounds in bonuses. The row emerged as the Serious Fraud Office confirmed it is pursuing criminal investigations against bankers involved in “an industry-wide conspiracy” to rig interest rates.

Joanne Segars, chief executive of the National Association of Pension Funds, one of the most powerful shareholder groups in the UK, said, “This whole issue has been deeply damaging and raises questions about pay which now need answers. Any severance payments to top staff must be kept to a contractual minimum.”

One report claims that Mr Diamond has benefited to the tune of £120 million from Barclays since 2007, while pension savers and shareholders, including some 750,000 small private investors, have seen the value of their holdings plunge.

Meanwhile, Paul Tucker, the Bank of England’s deputy governor, has had to give evidence to the Treasury Select Committee on his role in the Libor scandal. He is the Bank’s head of market operations, part of the job being to prevent disorderly markets at all times. He is also the man between the Bank, the markets and government officials.

No one has come out and openly accused him of any wrongdoing. In fact, the Financial Services Authority in the UK and the Department of Justice in the US both say that he gave no illegal instructions to Barclays regarding interest rates. Nevertheless, no matter how unjustified, some of the mud being slung over the scandal is likely to stick to him.

His situation has attracted much sympathy because, until the Libor disclosures became public knowledge, he was tipped to succeed Sir Mervyn King as the Bank’s governor in a year’s time. He will now have to wait and see whether the top job can still come his way.

During the past week, the opposition reluctantly backed the government’s plan for parliament to investigate the scandal. Following the most bad-tempered Commons debate for decades, opposition leader Ed Miliband agreed to drop his demands for a judge-led public inquiry into the matter.

The government and the opposition had been arguing for days over the nature of the inquiry and lessons to be learned about the wider culture and practices of the finance industry. The opposition lost a Commons vote calling for a judicial probe and found itself obliged to cooperate with a more rapid parliamentary inquiry backed by a majority of MP’s.

In other fallout developments, two leading agencies warned that Barclays’ credit rating could be downgraded amid concerns over management upheaval and falling revenues in the wake of the rate-rigging scandal.

Both Moody’s and Standard and Poor’s put the £20billion banking giant on negative watch following Mr Diamond’s resignation and the resignations of chief operating officer Jerry del Missier and chairman Marcus Agius. A third agency, Fitch, said political and regulatory risks for major global banks had increased but the direct implication for Barclays was manageable.

Mr Diamond has apologised for the “reprehensible” rate-rigging but insisted senior bosses knew nothing about it. He claimed to have learned just days ago the full extent of attempts to skew the Libor lending rate. Appearing before MPs, he said reading the boasts of cheating traders had sickened him.

But he denied being personally culpable for wrongdoing at the bank and rejected an MP’s invitation to forego his expected £23million handshake from Barclays. He also declined to elaborate on allegations from Barclays that senior members of the last Labour government played a part in the affair.

Although Libor, the London Interbank Offered Rate, is based on reports by banks about what they pay to borrow from each other, it also affects the cost of mortgages and loans. As a result, millions who have borrowed from banks in the past five years or so are likely to have been victims of Libor rate-fixing.