Diamond is forever?

 

The credibility of the British banking system has suffered another major blow. Barclays has been fined £290 million by the regulator for attempting to manipulate Libor, the London Inter Bank Offered Rate. This is the daily calculated rate at which banks in London lend money to each other for the short-term. Libor is therefore an important benchmark not only in global financial markets but it also heavily influences the cost of all loans and mortgages in the UK.

 

Barclays Chief Executive, Bob Diamond, has admitted that the bank’s control systems should have been much stronger. Certainly, this event, along with the debacle the week before which left NatWest and RBS customers without access to money, is further evidence that banks still remain too big to fail, too big to manage and too big to regulate.

 

Arguably, the Bank of England has been openly involved in its own manipulation of long term interest rates through Quantitative Easing. This buying of government issued gilts has been successful in keeping down the cost of long term borrowing is to the benefit of the nation’s economy and as such, is acceptable practice. But the authorities must draw the line. Corporate manipulation purely for profit is not.

 

The recent revised numbers from the Office of National Statistics showed that output in the UK shrank by 0.4% in the final quarter of last year. We remain in the midst of a double dip recession, albeit a shallow one. Talk that we are following a tough austerity programme is not matched though by a reduction in government spending which is estimated to have risen 1.9% in the first quarter. Without that effect the current recession would be deeper. Quantitative Easing has failed to re-ignite the real economy, hence the recent announcement from the Governor of the Bank of England and the Chancellor to support bank lending. A creditable working banking system is vital to the health of any market economy, especially one struggling to grow. What we didn’t know was that British banks were about to be downgraded by the rating agencies and that the FSA was investigating Libor manipulation.

 

Barclays share price has been hit hard and record fines of £291 million will dent the bank’s profits. However, there is no such agreement with investors and corporate clients, who have already launched a class-action lawsuit against Barclays in the US.

 

The FSA’s summary of the case with its incriminating emails between celebrating traders will give their lawyers plenty of ammunition to pursue their case. The total cost of litigation could easily dwarf the size of the fines. The FSA has not directly accused any of Barclays’ senior management of misconduct. Yet calls for the resignation of a contrite Bob Diamond are growing and in a ‘Shareholder Spring’ this may be the ultimate price. However shareholders would do well to remember his many strengths and finding a suitable replacement CEO would be no easy task.

 

John Husselbee

29th June 2012