Omniscandal

It is easy to understand Bob Diamond’s miscalculation. In the great pantheon of banking scandals, it was unlikely, he thought, that Libor interest-rate rigging would rank very high. Libor is the average interest rate at which banks lend to each other — or, rather, the rate at which they admit to lending to each other. Any metric that depends on bankers’ honesty is, obviously, wide open to manipulation, so when the Financial Services Authority decided to tighten the rules, with an investigation six months ago, the natural response was a yawn. Barclays had been bending the rules, but so had everyone else, and Barclays was so co-operative that the FSA reduced its fine by £25 million. So Diamond thought it was safe to settle first and take a bit of flak, assuming that it would all blow over quickly.

But the Libor scandal has acquired a potency that was unimaginable just a week ago. And it has exposed to the general public not just fraud in the banking sector, but the complicity of the regulators and even the (then) government. They were all united in their commitment to cheap debt, all desperate to believe that the prosperity that it seemed to bring was real. The Bank of England thought it had found the secret to economic stability. Gordon Brown’s government hailed the ‘end to boom and bust’. Regulators talked about the triumph of the ‘light touch’, giving banks the freedom to innovate, while not taking undue risk. The conditions which set the scene for the Libor scandal were the same ones which inflated the bubble that burst four years ago.