A complex game of regulatory whodunnit – who to blame for the LIBOR scandal?

Individual responsibility or collective fault? Who to point the finger at in the LIBOR scandal

by Sam Bright


Barclays Bank has been fairly comprehensively trashed in the past couple of weeks. It’s chairman, Marcus Agius, resigned to protect the chief executive, Bob Diamond; and then temporarily un-resigned when Sir Mervyn King made clear that Mr Diamond had to go. Other executives too have taken the plunge: notably, Jerry Del Messier, the (now ex-) Chief Operating Officer.

There are, as I see it, two main difficulties involved with blaming a few senior officials at Barclays.

Firstly, the main charge thrown at Barclays door by the regulators appears to be that they were systematically uncooperative; that, rather than brazenly breaking regulatory rules, they were repeatedly pushing those rules to their very limits. Two succinct soundbites form the last week’s committee hearing  set out the primary charges. According to Andrew Bailey, FSA’s head of banking regulation, there was a “culture of gaming – and gaming us”. And in the words of Sir Mervyn King, Governor of the Bank of England, “It is possible to sail close to the wind once, maybe twice or … three times – [but after] four or five times you do have to ask questions about the navigational skills of the captain on the bridge.”

There is a big difference between pushing the rules to the limits and breaking the rules themselves. By way of comparison, driving at, or slightly over, a 30mph speed limit so you can get somewhere as fast as legally possible would raise very few eyebrows; whereas doing 40mph on a busy city street would be a blatant breach of the law, and leave many bystanders hopping mad. Similarly, testing the regulator’s patience by pushing the regulations to their limits may not be ‘best behaviour’; but it is very different to knowingly and deliberately acting in breach of those regulations.

The law should be clear and capable of guiding behaviour. Generally speaking, acts done within the bounds of the law should not be criticised in the same way as blatantly illegal acts. A good example of this was Ed Miliband’s response to the ‘Jimmy Carr tax avoidance scandal’. The Labour Party leader decided that rather than condemning such legal behaviour as ‘morally wrong’, the correct response was to call for the change of a bad law. He said, “I’m not in favour of tax avoidance obviously, but I don’t think it is for politicians to lecture people about morality. I think what the politicians need to do is – if the wrong thing is happening – change the law to prevent that tax avoidance happening”.

There is an obvious analogy with Barclays. Whilst “sailing close to the wind” is (and should be) generally looked down upon in a realm where a banker’s actions may affect many others, there is an obvious problem with the regulatory regime if none of the impugned acts actually contravene any rules. That is exactly the gist of Barclays’ behaviour, if we look beyond the sole example of LIBOR underestimations. As said the FSA, Barclays sought to gain advantage through the use of complex structures which are “at the aggressive end of interpretation of the relevant rules and regulations“.

Secondly, there is a question of where responsibility should be placed for whatever nefarious acts did in fact occur. In the aftermath of conflict, the reconciliation process often involves blame being pinned on a handful of individuals, so as to exculpate the majority. This can be seen, for example, in the realm of international criminal justice: the International Criminal Court focuses on prosecuting those most responsible for crimes against humanity, rather than pursuing each individual soldier through the courts.We pin blame for the Nazi atrocities largely on a group of senior officials, such as Hitler, Goebbels, and Himmler. In Syria, we take aim primarily against Assad, whereas in reality he represents the broader ruling (Alawite) elite.

This phenomenon is not limited to international crimes. In apportioning responsibility, we tend always to want to identify specific individuals who are at fault. Following the 2010 oil spill in the Gulf of Mexico, BP’s CEO Tony Hayward was forced by public and political opinion to resign, despite no real evidence that he was any more at fault than many other employees of BP, Transocean, or Halliburton. At an altogether different level, football teams falling short of expectations tend to dismiss their manager and not their playing staff, as Andre Villas-Boas (amongst others) found out the hard way at Chelsea this year.

Similarly, perhaps, with the LIBOR scandal. There are questions as to how far responsibility can be pinned on the small band of allegedly fraudulent brothers at the top of the Barclays tree. It appears quite likely that at least neither Mr Diamond nor Mr Agius were in fact engaged in fraudulent behaviour. Rather, it is contended they allowed a culture to develop in which morally and legally dubious activities were permitted to go unpunished, or even to be celebrated with a slap on the back.

The blame for this is not solely their own. There are no indications that any real pressure was brought to bear on Barclays by either the FSA or Bank of England before the most recent furore erupted, and certainly not as regards the alleged LIBOR-fixing. This, despite the fact that Ben Bernanke yesterday stated that he could not say “with full confidence” that LIBOR is reliable, because “the British Bankers’ Association did not adopt most of the recommendations made by the New York Fed”. This relates to emails sent by the New York Fed to the Bank of England in 2007 with suggestions as to how to avoid “deliberate misreporting” of LIBOR – in response to which Paul Tucker, deputy at the Bank, said: “It did not set alarm bells ringing”. Perhaps a more finely tuned alarm is required.

After all that, whose heads should roll? Just the highest ranked at Barclays? Other candidates include, the Barclays compliance department who failed to spot anything was wrong. The regulators, who failed to regulate. Directors and employees of the many other banks soon to be dragged into this scandal. The politicians, who failed to establish a sufficiently tight regulatory regime.

Responsibility is not so easily apportioned. Causality is complex. Our desire to see some measure of punishment and retribution calls for someone, or some people, to take the blame when things go wrong. But justice does require that that punishment is fairly apportioned. At the moment, it is not clear to me that we have reached such a just conclusion. Diamond, Del Messier et al. are clearly not mere scapegoats; but it is evidently convenient to trash them, and sweep the rest under the carpet to protect the careers and reputations of many other powerful, and indeed generally very capable, individuals.

  1. Josh M said:

    I didn’t think that fraud was ‘within the bounds of the law’. The issues is not one of inadequate regulation, it is that the regulations (laws) in place are not being enforced.

    Driving at slightly over 30mph doesn’t allow you to gain wealth at someone else’s expense (stealing), as does manipulating LIBOR. Be sure not to underestimate this. Don’t dilute the seriousness of the crime itself just because it’s ‘difficult to identify who exactly is responsible.’ The worst thing we can do is mystify these things. Even though we’ll still identifying the full list of perpetrators, people need to understand that they’ve been robbed.

    Even mainstream economist Nouriel Roubini appreciates the seriousness of this: http://www.washingtonsblog.com/2012/07/mainstream-economist-we-might-need-to-hang-some-bankers-to-stop-illegal-behavior.html

    As this site is called Social Justice First, I’d like to point out that last summer’s rioters, generally not the most affluent types, got abnormally large sentences for their crimes, which generally involved petty theft or some property damage. You know, to ‘send a message.’ On the other hand, these super-rich criminal elites, who have caused trillions of losses to the global economy, countless foreclosures and ruined lives, and continue to enrich themselves at our expense, get a nip on the ear at best and the inconvenience of coming into parliament for an ‘inquiry’.

    Consider also then asymmetry of the anger towards these two groups and you’ll realise that something is very wrong indeed. People don’t fully understand these things. We need to make the core issues abundantly clear.

    It’s not speeding, it’s stealing.

  2. Thanks Josh.

    I agree with your comments re: the rioters. Some of those sentences were absurd, and many of them were wrong.

    In part however, the absurdity of those sentences links to my point in this article. Nowhere do I deny that Diamond et al have some responsibility. Nor do I deny that ‘stealing’ is bad, though I’m not quite sure that’s what we’re talking about here. The point is that it is easy to highlight a few individuals and pin all the blame on them. But what I want to know is, what will happen to Paul Tucker at the FSA, who says that warning of LIBOR-rigging set the alarm bells ringing? What will happen to the individual traders who misreported LIBOR estimates?

    Why are Diamond and Agius more responsible than them? Possibly they are, though I think the burden is on the accusers to show that. I would in particular be very surprised if those two were more responsible than the bosses of the other banks caught up in the scandal – banks who chose not to cooperate fully with investigations, and so whose wrongdoings are yet to be uncovered.

    Where fraud is committed, it should certainly be punished, and punished fairly severely (where the fraud was severe). This is why the SFO is investigating. I am sure that charges will be brought, both here and in America, and people will rightly end up in prison.

    However, I don’t think there is any evidence yet that Diamond & Agius committed fraud (though I may be wrong) – merely that they did not do enough to crack down on it. Given that Barclays employees many tens of thousands of employees, it may not be realistic for them to know of each instance of fraud in the 2005-2007 period, during which traders were lying for personal benefit. There is a problem there: as someone wrote, I think in the Guardian, not only are banks ‘too big to fail’, but also ‘too big to trust’: that even assuming the best will in the world, those at the top could never possibly know what occurs throughout the organisation.

    The 2007-2009 period is more complicated. At that stage, it appears that traders were not misstating LIBOR for personal gain, but rather because there was a systemic interest – going far beyond Barclays, to other banks, the regulators, and politicians, to keep LIBOR down. A lower LIBOR reduces borrowing rates for many people, not just banks, and it seems apparent that there was tacit acknowledgment by the Bank of England that a certain amount of ‘creativity’ in stating LIBOR figures might actually be a good thing.

    In that latter period, misstating LIBOR is not straightforwardly characterised as stealing. Nor is it easy to say that in failing to prevent it, Mr Diamond was committing fraud. And it certainly becomes very difficult to say that he was any more at fault than the many others in the system, including at the regulators, who appear to have more or less known what was going on and done nothing about it.

    It’s also worth pointing out that one bank alone cannot rig LIBOR. LIBOR is an average, which omits the upper and lower percentile of figures. Therefore, only if many of the banks on the LIBOR panel were cheating would there be any discernible effect on the final rate. A number of people have suggested that it is likely that other banks involved in the rigging were stating far less accurate figures than Barclays. Which again goes back to my question: is it just to pin the lion’s share of the blame on a handful of individuals who, whilst probably at fault, were no more so than many others in the system in which they operated?

    Also, I totally disagree that misstating LIBOR is a worse offence than speeding. People are killed on the roads by speeding drivers everyday. Misstating LIBOR, even if (which I think in the 2007-2009 period it didn’t) this amounted to stealing, is not as bad as killing people. Further, there are no regulators suggesting that it might actually be alright to break the 30mph speed limit (though it is different on motorways).

  3. Josh M said:

    Thanks for responding Sam.

    Yes we definitely need to scrutinise the regulators. We are hearing, for example, that in 2008 there was a lot of pressure for banks to submit lower LIBOR rates to ‘avert panic’ etc. There is also evidence that many people were aware of what was going on (http://theautomaticearth.com/Finance/libor-was-a-criminal-conspiracy-from-the-start.html). But as there is just one LIBOR submission per bank which is agreed on, individual traders aren’t especially relevant.

    I think you’d be wrong to presume that people will go to prison, though. No one will go to prison. And if they do it’ll be an irrelevant trader acting as a scapegoat. Professor William Black, perhaps the leading specialist on white collar crime, points out around 1500 bankers went to jail for the US Savings and Loans fraud in the 1980s. He was part of the prosecution. Yet no major financial institutions have been prosecuted for their fraud in this financial crisis and no bankers have gone to jail (I don’t include Bernie Madoff because he was operating independently and turned himself in). There’s no reason to expect that any will.

    Heh, of course I don’t equate manipulating LIBOR to killing people. But you spoke of going slightly over a 30mph speed limit, which suggested that you were speaking of a superficial technicality rather than a substantial difference (i.e. that between life and death). I wanted to point out that LIBOR is not just a little technicality because it shows up in pretty much every financial transaction. And as Black explains here, giving a false rate can also allow you to directly manipulate your position so that you will win rather than lose trades. That’s the stealing part, or at least maybe the most clear cut aspect of it.


  4. Josh M said:

    I do of course see your point that we need to confirm exactly who is responsible. Agreed.

  5. V C said:

    Hello! My first time on this blog.

    I wanted to say that I think I have a slight problem with the basic premise of your argument. As I read it, you are saying that the issue of responsibility in this scandal is likely to be intractably murky, and certainly very diffuse, and therefore we should not hurry towards some sort of knee-jerk reaction and simply scapegoat Diamond and Agius.

    I disagree. You appeal to the principle of fairness to say that it would be wrong to lay heavier penalties on a very small number of figureheads, when in fact just about everyone involved bears some degree of guilt.

    I do agree that it would be both impractical and counterproductive to just prosecute the whole lot, but I do not think that we should therefore avoid prosecuting figureheads. First of all, they do in fact share the burden of responsibility for what has been going on. Secondly, there is a clear public interest argument in favour of prosecuting even only a small but representative minority.

    The problem with the banking system overall is one of incentives. Any individual banker has every single possible incentive to bend the rules to breaking point, and absolutely no incentive to not do so – unless you presume that they are really that fussed about appearing before a toothless Parliamentary inquiry.

    Prosecuting now, and prosecuting hard, would set a precedent. And that precedent would help act as some degree of deterrent, or incentive against continuing these practices. Even if only a minority gets prosecuted, that will still constitute a risk which might be too much for some to take.

    And from then on, you can build up on that. As stated above, the problem is not so much one of regulations (it is that too, but not most immediately), it is one of enforcement of regulations. And if we are talking about that, we have to start somewhere.

    Your argument basically boils down to saying that we shouldn’t start in a hurry and risk committing injustices. I would say start in a hurry and start hard, and in the long term the latter approach is much more likely to avoid further injustices committed by these serial fraudsters.

  6. Mr Diamond and Mr Agius are about as guilty as the average mafia boss. They might not commit any crime themselves but they preside over and encourage a culture of lawlessness that they directly benefit from. If it’s ok for a mafia boss to go to prison then why not a bank chief executive?

    • I think there’s a bit of a difference between Michael Corleone and Mr Agius. Not much moral equivalence there, even if you substantiate the claim that Mr Agius actively encouraged activity which he knew to be illegal.

      There were two types of LIBOR rigging at issue. The most heinous was that committed by a number of ‘rogue dealers’ for their personal benefit. I don’t think there’s ever been a suggestion that either Diamond or Agius encouraged this, or indeed that they benefited from it, directly or otherwise.

      The second type is the more ambiguous. My argument is not that they were not at least partly responsible for allowing the under-estimation of LIBOR to go unchecked, but rather that many people, almost certainly hundreds accross the banking, political, and regulatory sectors, were in some way complicit in this, from the top of the Bank of England, to the Treasury, to both the leadership and the workers at many of the banks submitting estimates to LIBOR.

      Which of these people is most responsible, and should be held accountable? A difficult question to answer. If Agius should be, then logically so should all of the others involved. This is not the case, and I haven’t seen many people asking for the regulators to go to prison for tacitly encouraging this practice.

      Indeed, there is a strong suggestion that false reporting to keep LIBOR down might in fact have been in the national interest, regardless of whether it benefitted Agius and Diamond – and the benefit to them would anyway have been more indirect than direct.This is really incomparable to the mafia boss, who orders extortion and murder to further his own rather direct personal gain.

      Also note that it is far from proven that they have committed an unlawful act that could attract a prison sentence. If they did, then I would certainly be in favour of their prosecution: along with anyeone and everyone else who is guilty of a similar offence. Thus demands the rule of law.

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