Barclays not alone on LIBOR; other frauds will emerge

Soon, many other banks will join Barclays in facing the consequences of the LIBOR scandal. But as the net widens, the affair is telling us about more than just banking. Regulators, politicians and many other sectors will be called into question as the affair unravels. LIBOR fixing has some broader lessons for public morality.

The first victim, Bob Diamond, neatly fitted the public perception of a caricature investment banker. But others involved might not step so easily into the role of panto villain. So pervasive has been the attitude to LIBOR manipulation, and so deep rooted have been bad practices across the banking sector, that we should question the business model and not just the people.

What is remarkable is that numbers that played such a key role in the global economy should have been produced by a private body. There was little reflection of the public interest in the policing of the British Bankers Association and it seems unlikely it had any effective sanctions against contributing banks. This is in sharp contrast to other areas of public interest such as accounting standards.

LIBOR is far from the only case of fudging the numbers. Concerns are now being raised about the oil market and many other unregulated areas. Dozens of public and private bodies provide figures for a broad range of economic indicators, ranging from house prices to book sales. Some, unlike LIBOR, are based on reports of actual transactions. But most typically still lack transparency, and incorporate “adjustments” for seasonality or other factors. What these have in common is that they are no longer just academic exercises, someone somewhere has an agenda or economic interest.

When economic indicators drive economic policy, data matters. A few years ago, it was revealed that the Halifax house price index contained errors, yet it had been a key indicator driving interest rate policy. Indeed errors were found last year in the Government house price index, and this has since been transferred to the Office for National Statistics. Mistakes in numbers are nothing new, but much more now depends on these calculations.

It is easy to see the potential conflicts in other areas that we trust. For example, internet rankings of popularity might seem largely irrelevant, but many book stores order on the basis of the reports. The danger is that, as derivatives proliferate, there are much smarter ways to profit from this. Indeed, there are futures or complex instruments covering almost every area of life – even the weather. We can never hope to regulate every instrument involved, but should instead rely on broader legislation on fraud and on market abuse.

The biggest indicator of all, the inflation measure, has repeatedly seen Government intervention. Millions of pensions contracts hinge on CPI or RPI, and the Government-inspired move to the lower indicator has proved contentious. Indeed, suppressing inflation measures has at times almost seemed like a policy tool. Can the Government really keep the moral high ground on LIBOR when it has been so cavalier with its own statistics? And, when politicians demand action by shareholders, they will be reminded that the Government has controlling stakes in two British banks and can readily set the lead itself in best practice.

The scandal raises many other questions on ethics, involving regulators and central banks, and why so little was done on early whistle-blowing. The US Fed was aware of concerns as early as April 2008, and yet regulators on both sides of the Atlantic moved at a snail’s pace. As a result, many of the bank senior executives involved are now in new positions, some even in regulation and government. The public is watching to see whether politicians and central banks will keep up the pace of enquiry as it moves closer to home. It may be an uncomfortable period for some traders, but few at the top are likely to fall.

Contrary to the focus on Barclays’ misconduct, it may not prove the worst. The US Department of Justice highlights Barclays’ role as a whistle-blower – the first bank to confess and turn over its files. This candour in admitting past misdemeanours needs recognition to reflect due punishment for those who remain silent for longer. We should expect some bigger fines than Barclays’, or the message will be that sitting tight is the best way of keeping your job.

Proving civil losses will be tough. For much of 2007 and 2008, LIBOR was unrealistically low, and this suited governments as well as borrowers. The complexity of resolving this issue could lead to a broad public settlement, with proportionate contributions from individual banks, in a parallel with the US tobacco industry settlement. This may be a more attractive solution for banks than reimbursing fees earned on LIBOR-related derivatives and loans. But, co-ordinating this globally across so many countries and banks is likely to prove too big a challenge. Instead, fines by regulators seem more likely, with banks individually picked off as the email evidence is analysed. The Government knows that the immediate consequence of the threat of further claims and regulatory penalties will be for banks to reign back lending in order to boost reserves.

The parliamentary inquiry is likely to seize on the BBA anomaly, and bring credible public accountability to the LIBOR process. But how many other numbers need the same treatment, yet lie outside the scope of this inquiry? Can politicians from all parties give public leadership on LIBOR given their own cynical use of statistics? For now, Barclays’ position may be unenviable, but soon it will be able to watch as the LIBOR scandal envelops other banks, regulators and politicians.