The Royal Bank of Scot-free: Retracing the Libor scam

image via Ian Fraser.

[First published in The Morning Star, 09/02/13]

RBS chief Stephen Hester wore an especially frowny face this week to admit his bank’s role in the biggest scandal since the financial crisis itself.

Years of wholesale manipulation of the Libor rate had put a gloss on an otherwise collapsing economy, lured investors into risky financial products under false pretences and had gone on to fudge the figures of trillions of pounds’ worth of consumer loans and contracts worldwide, with the resulting sleight of hand driving businesses into bankruptcy and families from their homes.

But worst of all, it made them look bad.

There is no room in RBS or in our industry for that kind of wrongdoing,” he told reporters, adding without a trace of irony that “we won’t be the only bank with these findings of course.”

Indeed they won’t: Barclays and UBS have already been stung for their own part in the affair, while more than a dozen other banks across Europe, Japan and the US are also under investigation.

So what exactly did they do?

The scam, which preceded the financial crisis and spun merrily through the Square Mile right up until 2011, hinged on the inter-bank lending, or Libor, rate recorded by the British Bankers’ Association: a crucial measurement of market confidence used in financial transactions the world over.

And what painstaking calculations did the BBA’s boffins carry out? Well, at around 11am each morning they’d ring around and ask the banks themselves for the highest and lowest interest rates they’d expect to pay on various types of deals with their rivals. Then the Association would dump the outliers – the top and bottom 25 percent – and average out the mid-values, giving the so-called Libor rate of short-term interest.

In other words, the banks’ own employees were working cheek-to-cheek with trader colleagues who had a clearly conflicting interest, giving merely verbal assurances to an industry lobby group which just happened to be charged with collating one of the most crucial pieces of data in the global economy. The potential for fraud is obvious to anyone — except, remarkably, those who stood to directly benefit from it.

And so the papertrail shows staff at RBS, UBS and Barclays colluding with their trader colleagues for years on end, falsely raising or lowering the figures hundreds of times in line with their trading positions.

One chatlog from August 2007 finds a senior yen trader explicitly decribing the rate as “a cartel now”: “its just amazing how libor fixing can make you that much money”.

In December 2008 – two months after RBS’ £17bn taxpayer bailout – its primary submitter asks “what’s it worth” to drop the six-month Swiss rate to 0.01 percent. “i’ve got some sushi rolls from yesterday”, a Swiss franc trader replies.

As recently as November 2010 a yen trader warns that the New York Federal Reserve “are all over us about libors”.

“thats for the USD?” asks a senior trader. “yes”, he replies. “dun think anyone cares the JPY libor”, comes the response.

Just two days later a submitter refuses a senior yen trader’s request — only to continue the conversation by phone.

“We’re not allowed to have those conversations on [instant messaging]… So yeah, leave it with me, and uh, it won’t be a problem.”

Indeed it wasn’t a problem: across the way at Barclays Capital, then-head Bob Diamond explicitly told the Bank of England’s deputy governor Paul Tucker about the racket in October 2008. If Diamond’s memos are to be believed, Tucker called up to note complaints from the Treasury about Barclays’ relatively high reported rates.

“I asked if he could relay the reality, that not all banks were providing quotes at the levels that represented real transactions, his response [was] “oh, that would be worse”.

“Mr Tucker stated the levels of calls he was receiving from Whitehall were “senior” and that while he was certain we did not need advice, that it did not always need to be the case that we appeared as high as we have recently.”

When pressed by irate MPs last year, Tucker denied “leaning on” the bank and said he only meant to suggest Diamond keep an eye on the money market desk. But the point remains that the head of one of Britain’s biggest investment banks told the deputy governor of the Bank of England about an industry-wide racket six years ago — and the game continued apace, with Barclays on the bandwagon too.

So when Hester and his fellow executives assure us these days of a more “moral” banking culture, bear in mind that their own lily-white virtue did nothing to stop Libor fixing, interest rate swaps, or PPI misselling, or manipulating global food prices, or the credit default swaps that triggered the global financial crisis in the first place. And even now these solemn pronouncements issue from the same mouths that defend, say, tax-dodging as simply part of doing business.

“Morality” for the mighty amounts to an endless stream of polite panel debates at St Paul’s Cathedral and not much else.

What really has the City beating its collective breast is an empowered public that’s as cynical about the industry as those who robbed us in the first place.

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