“There was a period of remorse and apology; that period needs to be over.”
That was Barclays chief executive, Bob Diamond, about 18 months ago. He was defending bonuses as being a vital component of the banking industry, what with all the talent that it needs to hold on to.
Now he’s eating those somewhat foolhardy words.
Bob’s had to give up his bonus. And he’s had to apologise. Because Barclays has just been fined £290m for trying to rig one of the world’s most important interest rates: Libor.
Manipulating interest rates sounds pretty serious. And it is, although perhaps not for the reasons you might think. So how much do you need to worry about this? And what does it mean for your money?
What is Libor anyway and why does it matter?
The financial news is full of big numbers these days. We need €100bn for Spain. Germany is owed €700bn. It’s easy to start thinking that £290m isn’t actually that much money.
And it’s true, it’s hardly going to put Barclays in the poor house. But to put it into context, these are massive fines.
The $200m fine imposed by the US regulator, the Commodity Futures Trading Commission (CFTC), was a record. Same for the £59.5m charged by the Financial Services Authority. (The Department of Justice in the US accounts for the rest.)
So what’s the fine for? It’s all about interest rates. Specifically, Libor.
Libor stands for the London interbank offered rate. It’s the average rate at which banks will lend money to one another (there’s a euro-based one too, called Euribor).
You can get a full explanation in my colleague Tim Bennett’s video here: Libor: Britain’s most important interest rate. But to keep it short, 16 banks are asked each day to estimate how much it would cost them to borrow money. The top four and bottom four rates are knocked out of the equation. The average of the remaining figures gives you the Libor rate. Libor rates are taken for various periods of time, but three-month Libor is the benchmark.
The reason it matters is because lots of financial products and loans are priced off Libor. And the reason Barclays has been fined is because its traders tried – and succeeded, judging by the many emails floating around – to get the people who submitted the banks’ Libor estimates to put in figures that were either higher or lower than they should have been.
Why? Because they’d have been betting big on which way interest rates were going to move. So even a tiny shift in Libor – we’re talking hundredths of a percent – could potentially mean winning or losing a lot of money. So sometimes, they’d want the rate moved lower, or sometimes higher.
On top of that, during the financial crisis, when everyone was looking for signs of a bank being in distress, the submitters were encouraged to pretend the bank was able to borrow at a lower rate than it actually could, so that no one could tell it was in trouble.
How much does this matter for you?
First off, the actual Libor rigging itself isn’t something you need to worry about. On a practical basis, you can’t do anything about it, and it most likely hasn’t affected you.
For a start, it wasn’t just Barclays doing this. And not all banks would have been pushing rates in the same direction. As Matt Levine explains in a good post on Dealbreaker.com, “some banks wanted Libor too low, some wanted it too high, so maybe it ended up just about right. Maybe.”
For another thing, we’re talking about tiny shifts in rates here. Because of the amount of leverage involved, even a difference of one basis point (that’s 0.01 of a percent), would make a huge difference to these traders. Put it this way, you haven’t been paying too much on your mortgage or your credit card bill because of this.
But just because we can’t work out the precise impact, doesn’t mean it’s not important. Libor-fiddling by banks means we can’t trust that rate. And money-printing by governments means the ‘risk-free rate’ (the yield on gilts and US Treasuries) is meaningless too. So the building blocks of our financial system are looking very shaky to say the least.
More to the point, it’s yet another good reason to avoid investing in banks. As Jimmy Carr’s experience amply demonstrates, people are fed up with being ripped off. Doesn’t matter if everyone else was doing it. Doesn’t matter if it could be coated with a thin sheen of legality.
The good old days of everyone cheerfully getting rich together and not asking too many questions are gone, and they’re not coming back. Economist JK Galbraith talked about the ‘bezzle’. This is the fraudulent behaviour – legal and illegal – that goes undetected during a boom, and only comes to light as the bust unfolds.
We’re at the stage of the game where all that ‘bezzle’ is being revealed. And the banks are pretty much a bottomless pit of the stuff. At the heart of the bezzle, was the fact that banks were taxpayer-backed institutions masquerading as the embodiments of capitalism. So there’s plenty more where this came from. And Barclays wasn’t the only one involved – who’s next, and how big will their fine be?
I’ve just heard Robert Peston on the Today programme. He described the falling confidence in the banking sector as a problem, because “we need these institutions”.
But maybe we don’t. As my colleague Merryn Somerset Webb pointed out in a recent column, there are more and more alternatives to the traditional banking sector popping up. The problem of course is that most of these involve putting your savings at risk, because depositors’ money isn’t insured as it is at the banks.
But given the time and demand, that could change. If we can’t trust the banks to do their job honestly – as Barclays shows – and we can’t even trust them to do it competently – as RBS shows – then why do these pathetic, complacent, self-serving dinosaurs have any place in our society at all?
If you’re annoyed about this – and you should be – I suggest you vote with your feet. Deprive the worst offenders of your business, and of your investment, if you’re still holding any of these stocks.
• This article is taken from the free investment email Money Morning. Sign up to Money Morning here .
Our recommended articles for today
Should you buy this niche oil industry player?
Oilfield services company Petrofac aims to double its profits in the next three years. Will it succeed? And should you buy in? Phil Oakley investigates.
‘Grexit’ is a very high-risk strategy
No one knows how Greece leaving the euro would play out, says Matthew Lynn. That’s why it won’t be quick in coming.