03/07/2012

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Banking’s ‘Milly Dowler’ moment

June 29th, 2012

This is banking’s ‘Milly Dowler’ moment. Finally the blinkers are off and the rest of the world (by which I mean people like leading politicians and the mainstream commentariat) is waking up to the culture of rampant corruption and criminality that has infested the UK’s banking sector, about which I’ve been writing for years.
Britain’s biggest banks are entering one of the most challenging periods in their history, as they increasingly get found out for despicable practices to which the Labour governments of Tony Blair and Gordon Brown turned a blind eye, and which Labour’s disastrous “light touch” approach to regulation allowed to flourish unchecked.

Mervyn King calls for changes in banking culture - The Guardian video

Barclays was fined a record $451m after investigators found traders and senior managers “systematically” tried to rig the Libor and Euribor, its equivalent in euros. Barclays — together with Lloyds Banking Group, RBS and HSBC — are now facing massive litigation risk after mounting evidence that they were members of an “international cartel” of global banks that conspired to rig interbank lending rates, including Libor and Euribor in the period 2005-09.

The chances of Barclays chief exective Bob Diamond and chairman Marcus Agius remaining in their jobs are looking increasingly slim, with some commentators suggesting they are only being kept on as the Barclays board realises that, if the duo was to be fired, it would make the bank even more vulnerable to the massive tide of regulation that is brewing in the US.
Mervyn King, governor of the Bank of England, today called for a “real change in culture” in the banking sector (see video above) and urged the UK government to ensure that the Vickers proposals for separating retail banking from “casino” investment banking activities are enacted in full and at the earliest opportunity. Ruling out a Leveson-style inquiry into the sector, King lashed out at the banks for:-
“Excessive levels of compensation, shoddy treatment of customers and a deceitful manipulation of one of the most important rates”.
Discussing the deepening banking crisis, King said:
“There must be many people who work in the banking industry today, who know they are honest, hard-working and feel they have been let down by some their colleagues and indeed their leaders.
“Everyone now understands that something went very wrong with the UK banking industry, and we need to put it right.
“That goes for both the question of culture in banking industry and to the structure of the banking industry; from excessive levels of compensation to shoddy treatment of customers to a deceitful manipulation of one of the most important interest rates and now this morning to news of yet another mis-selling scandal.
“We can see that we need a real change in the culture of the industry. And that will require two things, one is leadership of an unusually high order and [the other is] changes to the structure of the industry …
“We don’t need an inquiry to know that we need to legislate for Vickers… we need to implement the Vickers reforms
“There is a degree of cynicism and greed that is quite shocking. I think we would be fooling ourselves if we thought that some of the behaviour and culture evidenced in Libor fixing are not found in some other areas of trading activity as well.”
Where Libor rigging is concerned banks including RBS, Barclays, HSBC and Lloyds Banking Group are facing the very real prospect of a full-on criminal investigation over their alleged fixing of the interbank lending rates, a scam which rigged global markets in their favour and seriously affected the fortunes of their derivatives counterparties, as well as all their borrowers including corporate, property developers, SMEs and homeowners. The Treasury has said it is looking at strengthening criminal sanctions for those responsible for market abuse delailed in yesterday’s FSA Final Notice harder hitting Commodities Futures Trading Commission report.
Lord Turner, chairman of the FSA, said that inside investment banking operations like Barclays Capital:-
“There is a degree of cynicism and greed that is quite shocking. I think we would be fooling ourselves if we thought that some of the behaviour and culture evidenced in Libor fixing are not found in some other areas of trading activity as well.”
This morning, it was also confirmed by the regulator that UK banks have been swindling small business and corporate customers on an epic scale over the same period as they were allegedly manipulating Libor — by forcing them to buy hedging products, including interest-rate swaps linked to the (almost certainly phoney) Libor rate that they did not need, in order to boost profitability. The FSA revealed earlier that Barclays, HSBC, Royal Bank of Scotland and Lloyds Banking Group had agreed to pay compensation to customers who were ‘mis-sold’ interest rate swaps (i.e. who were bullied, coerced or conned into taking out such products).

The FSA said banks ‘sold’ around 28,000 interest rate protection products to customers since 2001. However this is almost certainly a massive under-estimate. Bully Banks, which represents the interests of SMEs who were conned or coerced into buying interest rate swaps by their banks, believes the figure is more likely to be as high as 100,000.

Many observers believe the compensation costs for this epidemic of misselling will far exceed the estimated £6bn cost of compensating victims of the payment protection insurance (PPI) scandal. The potential cost of litigation from customers who the banks’ cheated by manipulating Libor and associated interbank lending rates are likely to be far, far higher even than the cost of compensating IRSA victims, and informed sources including The Left Banker, a former Goldman Sachs executive who now works for one of the world’s leading asset management firms, have speculated could be enough to bankrupt or precipitate runs some of members of “international cartel” of banks that conspired to rig interbank rates (a.k.a. the price of money).
TUC General Secretary Brendan Barber said Britain’s banking system is “out of control”. He said:
“We are now paying a heavy price for the decades when banks and finance persuaded politicians that they were the new engines of growth. It’s time for a fresh start for our finance sector that makes banking a utility that serves the rest of the economy, and ensures bank cheats face prison.”
Shadow chancellor Ed Balls, who share some of the blame for the regulatory race-to-the-bottom on which the Labour government embarked in 2002 and which enabled British banking into an ethics-free zone, bravely told BBC News there is a case for a Leveson style inquiry:-
“I do think that these calls we are seeing today for a proper, independent, arm’s-length inquiry which looks at the future and how we can get back on to a more open and honest footing, but also looks at the self-regulation of the 1980s and 1990s and the way in which the FSA regulated in the last decade – I think there is now a case. We can’t just brush this under the carpet. People are shocked by the swaggering arrogance of what we have discovered in the last 24 hours. We need to open this wide open.”
I have been calling for such an inquiry since November 2009. I stepped up the call in March 2012. By the way I disagree with King on two points:- (1) there is still a need for such an inquiry and (2) separation comes too late – the “let’s shaft the customers to line our own pockets” mentality that is pervasive in investment banking infected retail banking long ago and it is too late to turn the clock back. Perhaps it would be better to let them fail.

A PETITION HOSTED ON THE NUMBER 10 WEBSITE CALLING FOR A LEVESON STYLE INQUIRY INTO THE UK’s OUT-OF-CONTROL BANKING SECTOR, WHICH HAS GAINED 5,000 SIGNATURES IN THE PAST 24 HOURS CAN BE SIGNED HERE

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