Diamond(s) Are Not Forever

Did Barclays Bank executives engage in fraud to boost the bank’s market valuation — or because they lacked simple values?

July 19, 2012

Did Barclays Bank executives engage in fraud to boost the bank's market valuation — or because they lacked simple values?

Watching the UK’s Parliamentary Committee question the Barclays Bank executive team on TV recently created a sense of “déjà vu all over again.” It struck me as remarkably similar to the old U.S. gangster movies of the 1930s, in which the mobsters from Chicago — as in real life at the time — were called to provide evidence before U.S. Senate and government investigative committees.

Charged with flaunting the laws, price fixing on cigarettes and booze, as well as causing decent people and upstanding citizens general harm, the gangsters, dressed in their slick suits, offered well-rehearsed and always reasonable answers to the investigators.

The more senior the gangster on the witness stand, the calmer and more composed and eminently reasonable he appeared. Surely it must have been the others — the underlings, assistants, handlers and other scruff — who had done the dirty deeds.

Given all those phony displays of innocence, it was gratifying to see that at least some of the big names did get their comeuppance. But most did not.

When he took stand two weeks ago, the by then-former Barclays CEO Bob Diamond appeared slickly dressed and well prepared. He alternated between anger at what underlings had done to the family (uh, the company) and arrogance that he should even be called to such a hearing. He reminded me more of Al Capone than Captain Mainwaring.

Meanwhile, Marcus Agius, the outgoing chairman of Barclays, feigned a kind of “deer caught in the headlights” pose — a decent innocent man who was surrounded by charlatans. He conveniently called them, the charlatans, a “tiny minority.”

And yet the charges against Barclays and whatever other banks are part of the interest-fixing cartel are astonishing. In fact, the numbers beggar belief. To fix LIBOR means to control over £230 trillion ($350 trillion) of funds, a great deal of which is destined not for intricate financial products but to very real people trying to pay their mortgages every month.

Initially, the fines set by U.S. and UK regulators (at £290 million) seemed, to the 99% of us, quite staggeringly large — until we recognized that they represent just a tiny fraction of Barclays’ earnings.

In any event, bankers being bankers, we can rest assured that these penalties will likely find their way eventually through various “cost plus” formulas into the fees and charges paid by the very people onto whom the fraud was perpetrated. Morgan Stanley has now estimated that other banks caught in the scandal may face up to a combined $22 billion in penalties and damages.

Having led Barclays into this massive reputational risk, seen it fined £290 million and all but invited a criminal investigation, Mr. Diamond magnanimously agreed to bow out and leave the cleanup to others.

He even agreed to forgo a possible £20 million bonus (for that year) and instead, having resigned, was offered pocket money of just £2 million. That meager amount of executive pay, of course, is more than the other 99% of the UK’s populace will ever accumulate in a lifetime of work.

Of course, in the grand scheme of things, all of these amounts are small change in a financial sector where foreign currency trades alone swirl around at $4 trillion a day, where elusive financial products in the derivatives market are counted in the billions and where hedge fund managers reward themselves with bonuses the size of some countries’ GDPs. So why bother about some petty issues around a few unscrupulous bankers and their cronies?

The answer, of course, lies in what the Occupy Wall Street movement has termed “the 99%” — the very concerns of the rest of us. Those who want a decent life for themselves and their children — and yet are left with a feeling of powerlessness at what they see as unimaginable wealth and unstoppable greed. It’s not so much the 1930s that comes to mind, but the Gilded Age of the late 19th century.

Values, not valuations

The real fiasco that has caught the City of London is far more a matter of values than of banks’ market valuation. The truth is that the LIBOR crisis has cast in a glaring, inescapable spotlight what was previously so very artfully hidden: LIBOR is Finance 101 — it is additions, subtractions, divisions and multiplications. All simple stuff.

We are facing a serious and systemic crisis, a crisis of management, policy, regulation and, most important of all, public trust. In short, the financial industry is short of all the things it has always claimed to care about so deeply.

Hogwash. The trust deficit between the general public and “high” finance has never been greater. One wonders just how much longer the public can tolerate it before sparks start to fly.

We need to start asking some fundamental questions about why society needs a financial and banking sector. And then we must ask whether the current system is fit for that purpose.

Is the financial sector really helping the majority of people better their lives? Are funds flowing at an adequate rate into investments in the real economy to create jobs and provide us with a safer and more secure space to run our lives?

In light of all the talk about “uncertainty” in the economy at large — which is curiously paired with a great sense of certainty about continued increases in executive compensation — the answer is obvious. For the most part, it seems a charade, throwing smoke flares so that people can’t see clearly.

Let’s go look for the managers’ and corporate leaders’ claim of high degrees of accountability and of a moral compass. Is price fixing, making average folks even poorer, and bringing disrepute to a company of erstwhile high standing a sign of such integrity and rectitude? And what about a “request” to resign accompanied by the kindness of a parting gift of a couple of million pounds? What culture calls any of that accountable behavior?

We clearly need a new dialogue, a new beginning, a new values framework. Mr. Diamond’s arrogance and whatever follows in the investigations of other banks notwithstanding, these recent, glaringly obvious displays of disgraceful behavior may well be the litmus test for a new beginning.

The key point must be to put the banking sector into such a framework where it becomes the servant of the economy and the economy becomes the driver of positive, progressive and sustained change. The days when this concept was just the stuff of lofty sounding sales brochures are over.

Can we now dream of a financial and banking sector that could be at the forefront of constructing the new global society we need? A financial sector where our human, social and natural capital is protected, managed, funded and rewarded in a reasonable manner?

A financial system which delivers the funds to improve our lives and help create the small businesses that are so crucial for creating new jobs? A financial sector which, because it accomplishes that, earns and deserves respect, trust and admiration?

Only time will tell — although the pathetic and marginal meddling of the regulators over the past decade or two make one doubt our ability to turn things around any time soon. The shyness of governments to confront the issues head on, the arrogance and stubbornness of the bankers and the patience, disinterest and/or confusion of the general public will all be tested severely — and rightfully so.

We can do better — and we deserve better.

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Takeaways

Upon resigning, Diamond was offered a mere

The real fiasco that has caught the City of London is far more a matter of values than of banks' market valuation.

We are facing a serious and systemic crisis, a crisis of management, policy, regulation and, most important of all, public trust.

Can we now dream of a financial and banking sector that could be at the forefront of constructing the new global society we need?