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.
George Osborne, the Chancellor, is doing his best to protect the Bank of England but the evidence speaks for itself. True, Labour robbed the Bank of much of its official regulatory power. But its unofficial power is absolute. The Bank effectively sacked Diamond by quietly letting the Barclays board know that it had lost confidence in him. So why didn’t the Bank stop Libor, the official inter-bank lending rate, being fiddled? Paul Tucker, the Bank’s supposed stability chief, seems to have known in 2008 that the Libor interest rate was corruptible. So why didn’t he act then to fix the system?
The answer is that the ability to fiddle interest rates rather suited the Bank of England. It failed to bring stability, but instead it became quite good at faking it. Don’t worry, we were all told, there is not too much debt in Britain. If there were, inflation would rise. It was all nonsense. Consumer prices were being kept down artificially by a glut of cheap imports, while the Bank was pumping the British economy full of dangerously underpriced debt. The warning signs were there, in an asset boom which sent the prices — from fine art to housing — soaring. The Bank missed these warning signs. Its failure to stabilise the British economy is a scandal.
Cheap debt was, in the Labour years, seen as a new horn of plenty — and by everyone. To banks, it meant being able to take massive bets and reap unimaginable rewards — easy to come by in a bull market. To Labour, it meant a jackpot of cash. Brown’s greed for tax was just as pernicious as the bankers’ greed for profits. Every bonus paid in the City was split 60/40 with HM Revenue & Customs: it was a joint venture with the banks. The Financial Services Authority failed to prevent banks running down their capital ratios, or putting themselves at risk by lending long and borrowing short. So long as the taxes flowed in to fund Brown’s social programmes, his government did not worry too much about reckless lending and market manipulation.
Crucially, the problem was not light-touch regulation but wrong-touch regulation. Petty bureaucracy grew, obstructing citizens who wanted to open normal savings accounts. This resulted in the ridiculous situation in which children seeking somewhere to put their birthday money were asked to supply a list of documents including a driving licence and utility bill. But an investment bank wanting to make a massive bet, involving enough debt to sink a government? No problem.
And yes, many bankers behaved abominably — their industry being steadily corrupted in the way that Martin Vander Weyer, a former Barclays director, describes on page 30. But the bankers were the bartenders; others organised the party. It was not so much a conspiracy as a collective outbreak of greed and naivety. Brown thought that the world had made a one-off adjustment to a new era of permanently lower interest rates. The Bank of England, with its clever computer models, thought that stability now consisted only in managing the consumer price index. The regulators thought that City was entering a new golden age. And the Conservatives? There is depressingly little evidence that they thought at all.
Osborne’s spirited J’accuse is warranted: it was Labour who set up the financial architecture which allowed the City of London to descend into the casino of world finance. In telling James Forsyth that Brown’s aides ‘were clearly involved’, the Chancellor is speaking the unvarnished truth. But in so doing, he makes it hard — almost impossible — for Andrew Tyrie to chair a parliamentary inquiry. Labour MPs will now say that the committee is rigged, under political instructions from Osborne. The Chancellor may have overplayed his hand, endangering the chances of any inquiry.
The Libor scandal is starting to expose how the entire British establishment were behaving like addicts desperate for their next fix of cheap debt. And it is this addiction which inflated the credit bubble, and led to the ensuing recession. From the ‘senior figures within Whitehall’ asking why Barclays’ reported borrowing rates were so high, to the Bank of England suggesting that Barclays lied about its rates, this is — to adapt a piece of Westminster argot — an omniscandal. More heads need to roll.
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