The power of lies and money

The latest developments in the eurozone debt crisis appear to mark something of a "U" turn, with the European Financial Stability Facility (EFSF) declaring an end in sight to the "vicious circle between banks and sovereigns" where debt is concerned.

The answer will come with the establishment of a single supervisory mechanism involving the European Central Bank that allows the EFSF to recapitalise banks directly.

However, glimmers of light from the end of the eurozone banking crisis tunnel have almost immediately been sidelined by revelations in the UK banking sector i.e. the manipulation of the London Interbank Offered Rate (LIBOR) by Barclays and others and the mis-selling of interest rate hedging products to Britain's precious SMEs.

Fury over large bonuses for bankers and taxpayer bail outs appeared to have been replaced by disgust at the level of corruption at the heart of Canary Wharf, and renewed calls for heads to roll.

Amid the questions raised as to how these events could have come to pass and what was known by whom, I am asking only: "Why are we shocked by any of this?"

There have always been some greedy and some corrupt bankers. After all, banks equal money and money equals power, so expect the banking sector to be home to egos that wouldn't fit into a Franciscan monastery, cheats and liars, along with the highly professional and dedicatedly honest.

Given the above, when we have allowed traders to set their market place and treasury departments to be paid on commission, how can we be shocked at the idea of LIBOR being manipulated?

Personally, I am an advocate of light-touch or even self-regulation but anyone who doesn't understand the downsides of these approaches must be dafter than a brush, naive or stupid.

Particularly so when governance of LIBOR allowed banks to pre-set their own asset and balance sheet positions.

But let's not sacrifice Barclays, HSBC and the rest on the altar of the ill informed, superstitious and downright ignorant, because traders and chief executives are only human and banking history is littered with the consequences of their misdemeanours.

For those with long memories, start with National Westminster's Blue Arrow debacle of 1978 (when the entire board was forced to resign); Johnson Matthey's gold bullion crisis of 1984 (which cost the bank's existence); and then tick off banking scandal after banking scandal until you arrive at the cheeky Northern Rock Directors who continued misreporting arrears and possessions figures even after the bank had been nationalised.

Journey on through the collapse of Bear Stearns and Lehman Brothers and the recent allegations brought against Goldman Sachs and others over the flotation of Facebook.

As the snowball of LIBOR manipulation gathers pace, it has the potential to pick up various offenders – for which Barclays is currently carrying the can – and much as the aforementioned bank would appreciate some "press release" and an opportunity to pass on the LIBOR baton, what purpose will this serve for the UK economy?

For some, the answer is straightforward. It will be a trigger for the kind of regulation and enforcement that would prevent arrogance and corruption on the part of the bankers.

However, here we have to be extremely careful as we need to fully understand the extent to which regulators have been the cause of the diseases they are intended to prevent.

In this year's Reith Lectures, currently being broadcast on BBC Radio 4, economic historian, Niall Ferguson, has been reflecting on the causes of the financial crisis.

He makes the point that British banking was tightly regulated prior to the 1980s and yet in the 1970s the UK experienced a financially disastrous decade, which saw a major banking crisis, a stock market crash, a real estate boom and bust, double-digit inflation and an International Monetary Fund bailout (1976).

From here he suggests that bad regulation, rather than deregulation, is the problem, with the financial crisis that began in 2007 having its origins "precisely in over-complex regulation".

This hypothesis calls into question whether additional regulation can improve matters because by its nature it favours "complexity over simplicity; rules over discretion; codes of compliance over individual and corporate responsibility".

And here, it is worthwhile quoting a chunk of the economic historian's opinion as follows:

"Lurking inside every such regulation is the universal law of unintended consequences. What if the net effect of all this regulation is to make the SIFIs (Systemically Important Financial Institutions) more rather than less systemically risky?"

So, how do we prevent LIBOR being manipulated, mis-selling scandals, manipulation of the market and the rest? 

 - A round of confession to begin with - let's get everything over and done with as far as banks' murkier wrongdoings are concerned.

 - The Bank of England to take the lead in supervision, given that the FSA has repeatedly proved to be about as proactive as my most comfortable pair of slippers.

- Banks to have dedicated reporting processes and structures i.e. dedicated departments with firewalls that collect and report data to the regulator.

- A grace period of several working days for banks experiencing imbalances and abnormalities, or a new solvency test that allows for short-term solvency conundrums.

With all of the above and probably more, we could perhaps rest assured that LIBOR stands for London Interbank Offered Rate and not London Incestuous Bankers' Odious Rate!