Wednesday 21 February 2018

Diamond loses his sparkle

Embattled chief executive refusing to resign after Britain's most 'establishment' bank is fined £290m for rate-fixing scam

The £290m (€360m) fine slapped on Barclays by the US and UK regulators for conspiring to fix key interest rates, piles the pressure on its colourful chief executive Bob Diamond.

Even by the standards of recent financial scandals, Wednesday's announcement fairly took the breath away.

Barclays, long regarded as Britain's most 'establishment' bank, had been fined a record £290m by the US and British authorities for manipulating the LIBOR interest rate at which banks lend to one another.

The announcement unleashed a torrent of calls for Mr Diamond to quit. With his brash, in-your-face personal style and his mega-salary of £17m in 2011, plus £5.7m to pay his US tax bill, Mr Diamond, who has been chief executive of Barclays since January 2011, has never been an easy person to like.

Now that Barclays has admitted to wrong-doing on an epic scale, his many critics have not been slow to call for his head, while those from whom he might have expected some support have been conspicuous by their silence.

Both prime minister David Cameron and Bank of England governor Mervyn King have pointedly refrained from supporting Mr Diamond.

Responsibility

"People have to take responsibility for their actions and show how they're going to be accountable for those actions," commented Mr Cameron. "It's very important that goes all the way to the top of the organisation."

Which, translated into plain English, reads suspiciously like: "Go and go now."

Mr King has been only slightly less forthcoming, observing in the wake of the announcement that "something has gone very wrong" in the banking sector and repeating his call for the UK banks to split their investment banking arms from their retail branch banking businesses.

Mr Diamond's many critics have been far less restrained, with Labour Party leader Ed Miliband calling for criminal prosecutions.

"When ordinary people break the law they face charges, prosecution and punishment. We need to know who knew what, when, and criminal prosecutions should follow against those who broke the law."

For his part, Mr Diamond has strongly denied that he had any knowledge of the affair and has strongly condemned the rate-fixing scam, stating that it "falls well short of the standards to which Barclays aspires". He has also given up his bonus for this year.

This is more than just another tale of bankers behaving badly. LIBOR, the London Interbank Offered Rate, isn't just any old interest rate. It is in fact one of the most important interest rates in global finance.

It is used to price loans and derivative contracts with a total notional value of more than $500 trillion (€397 trillion) -- the equivalent of almost eight times annual global economic output. With such huge sums at stake even tiny movements in LIBOR can result in huge gains or losses.

This was far from being a victimless crime. By manipulating LIBOR, Barclays costs hundreds of thousands, perhaps even millions, of people and businesses money.

For such an important interest rate, the methods used to fix LIBOR were surprisingly uncomplicated; they were amateurish even. This made it very easy to manipulate.

Interbank

Every day at 11am the major players in the interbank market, including Barclays, would simply phone in their average cost of funds to financial information company Thompson Reuters, which would then calculate that day's LIBOR.

The integrity of the process depended on the banks supplying accurate information.

With at least 12 banks now being investigated, it is clear that this was not always the case.

Following last Wednesday's announcement, a series of emails between Barclays' bankers and traders, discussing how they might manipulate LIBOR, were also released. The impact of these emails has been devastating.

"We need a really low 3m (three month) fix, it could potentially cost a fortune. Would really appreciate any help," one banker emailed a trader.

"Dude, I owe you big time! Come over one day after work and I'm opening a bottle of Bollinger," a grateful trader at another bank emailed a Barclays counterpart who had assisted him in securing a favourable LIBOR rate.

After reading the emails, it's difficult to disagree with former UK chancellor Alistair Darling's description of LIBOR as "a work of fiction".

Even more worrying than the fact that traders at Barclays and other banks manipulated LIBOR to their own advantage and to the disadvantage of their customers, Mr Diamond has now admitted that Barclays deliberately submitted artificially low LIBOR figures during the 2008 financial crisis.

By making it seem as if its borrowers costs were lower than they actually were, Barclays was deliberately conveying a false picture of its financial strength to regulators, shareholders and customers.

While Mr Diamond is adamant he was unaware of any wrongdoing, it is unfortunate that, before becoming chief executive at the beginning of last year, he had been head of Barclays' investment banking arm, Barclays Capital since 1997. It was traders at Barclays Capital who were found to have manipulated LIBOR.

In other words, the wrong-doing occurred on Mr Diamond's watch.

While no evidence has been found linking him personally to the rate-fixing scandal, this at best entitles him to a fool's pardon. If he didn't know, why didn't he know?

Until last Wednesday's announcement, Mr Diamond's 11-year stint at the helm of Barclays Capital had been deemed an outstanding success by investors. In common with most of the other British clearing banks, Barclays attempted to build up its own investment bank after the 'Big Bang' of 1986 opened up access to the London Stock Exchange.

Unfortunately, things didn't work out as planned for Barclays and by the mid-1990s its investment banking arm, BZW, had fallen by the wayside.

In 1996 Barclays recruited Mr Diamond to run its investment banking operations, which had by then been renamed Barclays Capital. Under his leadership Barclays Capital was transformed from also-ran into a global investment banking powerhouse.

The high point of Mr Diamond's reign at Barclays Capital was the purchase of Lehman Brothers' US brokerage arm for what turned out to be a bargain-basement $1.89bn after the Wall Street investment bank went bust in September 2008. Indeed Barclays got such a good deal that the Lehman estate and creditors later unsuccessfully sued, seeking to recoup $11.2bn in "windfall" profits.

Following his success at Barclays Capital, Mr Diamond, the son of second-generation Irish immigrants, was a shoo-in to succeed John Varley when he announced his intention to retire as Barclays chief executive in September 2010.

Last December, in an interview with the 'London Times' newspaper, Mr Diamond revealed that he had imposed a "no jerk" rule at Barclays and that he had fired 30 executives for breaching his new ethics rules. What about sauce for the goose also being sauce for the gander?

However, despite the controversy that has erupted since the announcement of the fine, Mr Diamond is steadfastly refusing to resign. Yesterday, in a meeting with analysts from US investment bank Morgan Stanley, he re-iterated his determination not to quit.

But will the choice be Mr Diamond's to make? With the Barclays share price down 15pc since the scandal erupted, and the controversy showing no signs of abating, shareholders may conclude that 'Diamond Bob' has become an expensive liability that must be shed.

Irish Independent

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