Panorama : The Big Bank Fix – LIBOR and the Bank of England (2017)

Fascinating – if flawed – stuff from the BBC Panorama team. The Big Bank Fix is an investigation by Andrew Verity which asks “if the right people” were prosecuted for the “biggest financial fix of all time”. The programme discusses LIBOR – the inter-bank interest rate set in London for loans between banks which is a key lever controlling the flow of capital between financial institutions. This rate is set by reporting between the banks of the average loan rate they are charging or being charged. It is important as this forms the basis for the cost of money. Ultimately, LIBOR influences what interest rates consumers pay for loans.

Banged To Rights

As the programme demonstrated, any manipulation can have a devastating effect on businesses and individuals. The example was of a caravan site business that took a loan from Barclays which depended on the prevailing interest rate. This collective had been sold an instrument which – counter-intuitively – meant that any drop in interest rates generated prohibitive costs; advising their customer in effect to bet on higher rates. They were driven out of business, arguably as a result of Barclays’ market knowledge and mis-direction. Verity also touches on what was known amongst higher management about the practice of manipulating LIBOR to enables banks to make money from the market. He re-hashes the well-trod but unanswered point that only low-level ‘rogue’ traders were prosecuted; management has in effect been absolved of rigging. Finally, he attempts to link the Bank of England to the scandal of lowballing; the process by which banks influenced the rate and the market by reporting lower-than-real rates being paid or charged by them into the market. Much was made of the prosecutions – and convictions or acquittals – of traders in UBS and Barclays. Tom Hayes (UBS) received a mind-blowing sentence of 11 years and the programme poignantly presented his wife and son as collateral victims. Equally, it highlights that no management level prosecutions were brought; this despite Verity’s assertion that then-CEO of Barclays, Bob Diamond,  knew about “lowballing”.

Yeah, Nah

The problem is that the programme tries to link the Bank of England’s influencing of banks in setting LIBOR with manipulation of the index by banks for their own gain. Sounds like a major scandal; open-and-shut case etc. Cue wailing and gnashing of teeth, reputational damage to an industry that underpins our economy, and yet more indications of British weakness and hypocrisy. Some of this is true but it seems sensationalist of Verity to link the manipulation of LIBOR in order to make money to influencing banks to ensure that the fallout from the banking crisis was minimised. If the BofE made a mistake it was that – in asking them to influence a move of LIBOR to protect the economy – it should have insisted that the banks did not attempt to exploit the situation (something that Verity does neatly demonstrate in the case of Barclays and the caravan-owning-collective). It should also have penalised immediately and significantly those that did, pour encourager les autres (this assumes that the BofE can even detect such abuse). Ideally the BofE (or more properly, the FCA) should have powers which contain sufficient anti-trust provision to manage the banks. Mervyn King was actually fairly clear on the actions that the BofE took – and why – in his testimony to the UK Parliamentary Select Committee. In the past, the Bank had powers to manage the market – remember MLR (minimum lending rate) ?

Fix The Big Banks

The blatant profiteering and misleading of clients by Barclays demonstrated in the programme is a scandal. As institutions which are linked so closely to our well-being, banks cannot be left to operate as ordinary corporations; nor can the BofE or the FCA expect to manage them as a Gentlemans’ Club. There can be no doubt that Tom Hayes committed a crime; manipulating people and the market for his own benefit. Should he have received such a long sentence ? Seems harsh when compared with other crimes. Regardless, he also did so presumably as a result of targets and instructions set by his superiors. It is not news that there is a case for more senior banking personnel to face prosecution as the directing minds behind market manipulation – is “only following orders” a defence ? That prosecuted individuals would point to the Bank of England doing the same thing as part of their legal defence is reasonable but disingenuous. In seeking sensation, Verity seems to have missed this (as does Chris Philp MP).