The Libor distraction
Manipulating markets constitutes corporate fraud, regardless of whether or not those who engaged in such activities believed they had the cover of the Bank of England to do so. So it’s right that the Serious Fraud Office has been given the resources it needs to investigate Libor-gate and if parliament also wants to conduct its own investigation, it of course also has the right to do so.
But it is wrong to link this – extremely serious – issue into the general debate about either banking pay, the causes of the crisis, or whether or not the retail and wholesale operations of banks should be separated. Each of these three issues – pay, blame, universal banks – still stands or falls alone on its merits.
It does not appear to be personal gain that motivated those involved in this alleged fraud, but a concern that the higher borrowing costs faced by Barclays were destabilising both that company and the entire financial system. Corporate and national gain, rather than individual, except insofar as people may have felt they were instructed to act in this way and did not question their line managers.
We need to get to the bottom of the debate on bankers’ pay regardless of who reported what lending rate to whom and why. My own view is that there’s nothing wrong with a company agreeing to pay an individual a certain amount to perform a certain task. If that task is not in the national interest then that is a matter for the regulators. If it’s not in the company’s interest then the company will suffer, which will be of concern to its owners (not to mention staff and customers). It’s the apparently arbitrary allocation of discretionary bonuses, not tied to specific performance outcomes, however, that has little effect on performance and so is ripe for hefty taxation, not the level of contractual pay and bonuses linked to outcomes.
If there is an effective cartel among professionals that is pushing pay up, then, as I argued in a pamphlet last year, the Office of Fair Trading should have its remit expanded to look at anti-competitive practices in labour markets. At present they are only mandated to look at product markets.
This, in turn, is separate from what caused the financial crisis, which was basically that products were sold that were more risky than anyone realised, and then spread around the global financial system so that everyone was affected. IMF data shows that by far the largest culprit even after population is taken into account is the United States, but everyone was affected by the tightening of credit conditions that ensued. The response to this is better understanding of risk, tighter regulation and more capital controls to make banks more resilient in the interests of all of us. All of this is happening.
Less clear is what to do about banks that have both wholesale and retail operations, of which Barclays was a prime example. It sounds great on the doorstep to say that we should separate the functions of ‘casino’ from ‘high street’ banking, mainly because the word ‘casino’ has implications of recklessness. But there isn’t much connection between the specialisms of financial institutions and how they fared in the crisis. Northern Rock was, after all, a regional retail bank. It relied for its day-to-day funding on its ability to roll over debt in the wholesale markets, which made it vulnerable when those markets seized up, but it wasn’t in any sense of the word an investment bank; neither were Bradford and Bingley and Dunfermline Building Society, both of whom also failed.
Similarly, Lehman Brothers and Bear Stearns, both of which collapsed, did not have mainstream retail operations. Indeed, research published by the European Central Bank shows that a diversified model of banking is less risky than a specialised one, perhaps because it enables resources to be put where they are most needed in tricky times.
The problem for Barclays is that paying a fine, a criminal investigation and the resignation of its chair and chief executive may not be enough to have seen to pay the price for the rigging of markets. The politics of retribution may come into play. But ultimately, breaking a bank up might only make it less resilient at a time when we desperately need our banks to be robust.
Bank of England, banking, banking reform, Barclays, economy, finance, IMF, Kitty Ussher, Lehman Brothers, Libor