Investment losses triggered an enormous erosion of private wealth. Housing and capital markets went into a downward spiral and credit stopped flowing. Emergency funding to the banking and financial services sector solved neither the underlying liquidity nor solvency problems. It merely transferred the risk. Sloganeering about the inherent unfairness of “privatised profits and socialised losses” became more than a worn-out cliché.
Throughout the crisis and beyond, senior bankers expressed carefully couched regret. At no stage did they accept responsibility. Instead a narrow technical defence was proffered.
As the immediate crisis facing the banks receded, the strategies were framed even more aggressively. To preserve the sanctity of contract, there was a stated need to uphold terms entered into freely (if misguidedly). Moreover, a similar rationale justified the payments of market-determined bonuses to executives then working in de facto nationalised institutions. Second, the privileging of caveat emptor facilitated the transference of responsibility. Equally understandably, both sets of strategies fuelled public resentment. This prompted, in turn, political recognition of the need for substantive reform to safeguard legitimacy.
Into this toxic environment has emerged the Libor scandal. The $US450 million regulatory fine is just the beginning for Barclays, which is a defendant in some of the 24 interrelated Libor lawsuits that have been aggregated before a Manhattan federal court. US liabilities may be higher because US plaintiffs are permitted to request punitive damages, while UK plaintiffs are limited to compensatory awards.
Criminal liabilitycould be added to those regulatory fines and civil lawsuits. Further, the Barclays settlement is just the first in the joint trans-Atlantic investigation. On August 3, 2012, the Royal Bank of Scotland confirmed that it had retrenched staff in relation to the Libor scandal, with chief executive Stephen Hester stating that “it is a stark reminder of the damage that individual wrongdoing and inadequate systems and controls can have in terms of financial and reputational impact”.
On August 16, 2012, Bloomberg reported that subpoenas have now been sent to JPMorgan, Deutsche Bank, Royal Bank of Scotland Group, HSBC (which has been hit with a record-breaking US$1.9 billion fine for money laundering by US regulators), Citigroup and UBS, all of which are being investigated with respect to Libor manipulation. Media outlets are reporting the first arrests from the Libor scandal.
While the method by which Libor is set largely contributed to such widespread collusion, it could not have persisted without negligent oversight and the failure to enforce by regulators.
In the aftermath of the scandal, the New York Federal Reserve has played defence, stating that it although in 2008 it was aware of the structural flaws in setting Libor, it lacked the jurisdictional power to effect any meaningful change other than provide written recommendations to the Bank of England.
For its part, the Bank of England claimed that the recommendations lacked the substance to either start an investigation or even set off alarm bells. The tortured justifications, while self-serving and deeply problematic, could also equally apply to US regulators who are faced with equally serious questions of competence.
In the United Kingdom itself, the Libor scandal has had a deep impact on regulatory authority. The Treasury Select Committee provides a devastating critique of past, current and future trajectories, accusing the FSA of being blinded to the initial and ongoing systemic failure of compliance at Barclays.
“The FSA has concentrated too much on ensuring narrow rule-based compliance, often leading to the collection of data of little value and to box ticking, and too little on making judgments about what will cause serious problems for consumers and the financial system”.
