Repent, O Ye Bankers

Said the Bishop, in humbling homily:
"You bankers are quite the anomaly.
I'd like to convert you
To living in virtue,
Instead of behaving abom'nably."

The Wall Street Journal's Jason Zweig writes that the Church of England has called for "the financial industry [to] look within and search its soul." This call to soul-searching followed an invitation from the British parliamentary commission on the LIBOR-fixing scandal for public comment on how to reform finance. "The church calls for two striking steps," writes Zweig.

First, bankers should seek to build “a culture of the virtues” that would enable anyone working in finance to answer the question, “What would it mean to be a good banker?”... Second, the financial industry needs to apologize and repent.

The Rev. Dr. Malcolm Brown, director of the Church of England’s Mission and Public Affairs Council, elaborates:

It’s like shoplifting: Even if you put what you took back onto the shelf, you still did something wrong. Just restoring the status quo ante doesn’t give people the sense that trust has been restored. You can’t just put it back on the shelf; you have to admit that the way things were done was wrong.

Day of LIBOR Reckoning

Said a banker: "We used to condone
The rigging the cost of a loan,
A benevolent practice
'Til many attacked us,
And now we must humbly atone."

The LIBOR rate-rigging scandal slowly rolls on, and by all appearances will continue to do so for some time. Bloomberg reports that management of RBS condoned and participated in the manipulation of the London Interbank Offer Rate, beyond the four traders who the bank has fired. And why not? “This kind of activity was widespread in the industry,” said David Greene, a senior partner at law firm Edwin Coe LLP in London. “A lot of the traders didn’t consider this behavior to be wrong. They took it as the practice of the trade. This is how things operated, and it seemed harmless.” Canadian regulators are currently pursuing legal action against, besides RBS: HSBC Holdings Plc, JPMorgan Chase & Co., Citigroup Inc., Deutsche Bank AG, as well as interdealer brokers ICAP Plc and RP Martin Holdings Ltd.

To any interbank traders, bank managers and all others beginning their Day of Atonement at sundown tonight, Dr. Goose wishes you an easy fast.

Day of LIBOR Reckoning

Though collusion on rate executions
Was the norm in finance institutions,
When the tide quickly turned
Many bank traders learned
They would naturally face prosecutions.

The trouble with a culture of open financial fraud is that it leaves behind quite a paper trail in the unlikely eventuality that the authorities ever decide to crack down. So it is with the London Interbank Offer Rate-setting process, in regard to which US federal prosecutors and European regulators now intend to arrest individual traders on both sides of the Atlantic. Accounts differ as to how long the manipulation of LIBOR and related interest rates has gone on - some say 15 years - but central banking authorities in the US and UK have known of it since at least 2008. That was when staff members of the Federal Reserve Bank of New York discussed LIBOR with one or more traders who told them that their submitted rates were fake. Alarmed, then-FRBNY president Timothy Geithner sent off a "best practices" memo to Bank of England governor Sir Mervyn King, outlining ways to curb the abuses. Four years later, the media attention and public outcry have seemingly forced the hand of officialdom; against whom, we will soon hear.

From Geithner to King re: LIBOR

Some traders disclosed to the Fed
That LIBOR deceit was widespread;
The news reached Tim Geithner,
Who responded by writin' a
Quite well-stated memo, 'tis said.

In verbiage clear and concise,
Mr. Geithner dispensed his advice
To follow the fundin'
Of bankers in London
To find the most accurate price.

But the memo to King, while persuasive,
Is fairly alleged as evasive,
In its glaring exclusion
That traders' collusion
On setting of rates was pervasive.

Simon Johnson writes in his Baseline Scenario blog that the Federal Reserve Bank of New York may have missed an opportunity to inform its counterparts at the Bank of England of the LIBOR manipulation occurring back in 2008. Interbank traders active in the LIBOR-setting process had plainly admitted to the New York Fed that they gave self-servingly false indications of the rates at which their banks could fund themselves. Understandably concerned, the FRBNY's then-president Timothy Geithner spoke with the English central bank governor Sir Mervyn King, and followed up with a memo outlining his staff's recommendations for improving the LIBOR process. The memo, a model of brevity and clarity, outlines six proposals to improve the accuracy of LIBOR, which is based on funding rates reported by US and other international banks in the London market. Among the proposals: "Eliminate the incentive to misreport" by randomly selecting quotes from a subset of reporting banks.

What the memo did not mention was that the Fed already had admissions of fraudulent reporting from some of those banks. How might things have turned out differently if it had?

A Victimless Crime?

Said an interbank trader, at pains
To manipulate LIBOR for gains:
"Though perhaps this offense
Is at someone's expense,
It's alright unless someone complains."

After the scandal and outcry over the fraudulent LIBOR fixing at Barclays and other banks, and the large fines and executive dismissals imposed upon Barclays by British regulators, came the inevitable, what's-the-big-deal backlash from those arguing that this is old news, that everybody does it, and that it's a victimless crime. MIT economist Simon Johnson answers the naysayers in a New York Times column. First, the fact that the rate-rigging has long been an industry practice is more - not less - troubling, as it goes to the heart of the cultural encroachment of fraud and corruption in the financial industry. Likewise, if everybody is in fact doing it, how much more Herculean is the task of cleaning the financial Augean stables. Finally, the notion that the LIBOR fraud is a victimless crime is false on its face. If two parties enter into a transaction and one of them is secretly rigging the price to his benefit, then the other party loses. Though the complexity of the global financial system may make it conveniently difficult to identify the victims, they nevertheless do exist.

A Banker Called To Account

Said Barclays' Bob Diamond quite bluntly:
"I roundly resent the effrontery
To be fired abroad
For a silly old fraud
We'd soon overlook in my country."

The LIBOR-setting scandal has caused heads to roll at Barclays Plc, the first bank to be investigated in the case. Among them is CEO Robert E. Diamond, Jr., a "hard-charging" American who has been relieved of his duties at the behest of the Bank of England and the Financial Services Authority.

As Gretchen Morgenson wrote in The New York Times, he may have "thought he’d be subject to American rules of engagement when confronted with evidence of wrongdoing at his bank. You know how it works on this side of the Atlantic: faced with a scandal, most chief executives jettison low-level employees, maybe give up a bonus or two — and then ride out the storm. Regulators, if they act, just extract fines from the shareholders."

In a refreshing change of pace, British regulators actually demand that bankers be called to account for their wrongdoing.

LIBOR Rate Upset

There's an interbank market in London
To set rates where one's fellows will fund one,
But if dubious sorts
Give phony reports,
Then faith in the market is undone.

Barclays PLC Chairman Marcus Agius has resigned to take responsibility for the LIBOR rate-setting scandal that resulted in a $453 million settlement paid by the bank. The significance of the scandal is that, by reporting artificially low rates to the British Bankers' Association in the months before the financial crisis unfolded, the bank (and other participants in the rate-setting scheme) made it appear as though the market for bank liquidity was more stable than was actually the case. Thus, what could have been a valuable warning sign was missed; the canary in the coal mine was kept on artificial life support.