Members of the British Treasury Select Committee, US congressional investigators, state attorney generals and class actions lawyers who are investigating just who knew what and when in the sprawling investigations into the manipulation of Libor, would do well to emulate the forensic skills of former Manhattan District Judge Milton Pollack.
Judge Pollack, who died in 2004 at the age of 97, was one of the most influential white-collar crime jurists in the United States. He presided over many of the recurrent crises facing investment banks. His track record included disentangling the complex issues surrounding the collapse of Michael Milken’s junk-bond empire at Drexel Burnham Lambert. He forced a settlement in that case in 1992 that could be encapsulated in a single piece of paper, which according to an obituary in the New York Times, he had framed and displayed in his Manhattan office. Judge Pollack was, however, just as sceptical of spurious claims. In 2004, he dismissed two actions taken against Merrill Lynch arising from conflicts of interest in analyst research. He accused the plaintiffs of attempting to use securities law "to underwrite, subsidise and encourage their rash speculation in joining a freewheeling casino that lured thousands obsessed with the fantasy of Olympian riches”.
Ascertaining which side of the ledger the Libor crisis should be recorded on has become the single most important issue in regulatory politics since the crisis began. It raises profound questions of the intersection between corporate culture and regulatory oversight. The multiplicity of claims now being lodged over the manipulation of Libor have been provided with a raft of conflicting testimony over who was responsible for creating and legitimising what Judge Pollack termed the "freewheeling casino” of contemporary financial capitalism.
In a sign of exasperation, a government backbencher serving on the Treasury Select Committee, Andrea Leadsom, complained that lawmakers were forced to decide between ascertaining whether there was past ‘monumental incompetence’ or ongoing ‘very cynical attempts to cover up wrong-doing.’ Ms Leadsom distilled the core issue in questioning of Jerry del Missier, the Barclays investment banker who instructed his traders to artificially lower rates at the height of the crisis in October 2008. This, he claimed, followed an explicit instruction from Bob Diamond (the then head of the bank’s capital market operation) who had, in turn, based the calculation on an exchange with Mr Paul Tucker, the head of financial stability at the Bank of England, which the investment banker, but not the central banker, had taken the time to note.
Mr del Missier suggested that he did not see the submission of patently false bids as a big deal in the context of the time. While Mr Diamond had testified that he did not issue a direct order to lower submissions, Mr del Missier, in a crucial exchange, stated unambiguously that "it was an instruction, yes”. Moreover, he based this recollection on a telephone conversation in which the email and its import had been discussed. Desperate times, he claimed, called for desperate measures. "It did seem an appropriate action given that it came from the Bank of England.” October 2008, he claimed, saw the entire financial system hanging by a thread. Without checking with the Bank of England, he therefore "relayed the instruction and fully expected [that] the Bank of England’s views would be fully incorporated in the Libor submission”. While now conceding that it was improper (if not going as far as admitting its illegality), he argued that in the context of the crisis, "it seemed entirely appropriate”, as "the Bank of England had the expertise”.
Mr Tucker, it will be recalled, had earlier testified to the Treasury Select Committee (TSC) that when he called Mr Diamond to discuss market and political concern over the cost of borrowing, it was on the basis that Barclays may have inadvertently been allowing its traders to push it over the cliff. It is unfortunate for Mr Tucker that the call was not recorded by the central bank. The absence of corroborating evidence is problematic. As the chair of the TSC noted disapprovingly at the time, the failure to take notes was "a bit of a mess”, to which the former frontrunner to replace the governor of the Bank of England this northern autumn could only rather plaintively answer in the affirmative.
The mess extended to the Financial Services Authority (FSA), which also faced a series of just as uncomfortable questions at the TSC. Lord Adair Turner deflected responsibility by accepting that prior failure to monitor the operation of Libor had raised a series of "legitimate questions” about the "risk map” adopted by the FSA. The blame, however, reflected primarily a corrosive culture at Barclays, which he claimed "was not being totally honest with us”. According to a letter written in April by the head of prudential regulation at the FSA, Andrew Bailey, Barclays "was an ‘outlier in terms of the degree of the bollocking” required to force it to accept change. Mr Bailey concurred that suggestions from the chair of the TSC that the evidence provided by Mr Diamond on the extent of regulatory concern, provided before the release of the letter, reflected a similar pattern of behaviour. The bank, he claimed had "a culture of gaming and gaming us”.
This is all too neat. The scandal over Libor extends far beyond the actions of Barclays at the height of the financial crisis. Rather, it reflects ongoing failure to take concerns over the manipulation of rates over a sustained period. It leaves unresolved why the FSA approved the elevation of Jerry del Missier to chief operating officer given such alleged concern, and why the FSA did not release the letter in advance of Mr Diamond’s testimony.
The cumulative effect of the FSA testimony is to tarnish the credibility of the bank, which, not surprisingly, it is balking at. In a memo to staff penned by the bank’s chairman, Marcus Agius, and released yesterday, the executive committee called for calm. "As other banks settle with authorities, and their details become public, and various governments' inquiries shed more light, our situation will eventually be put in perspective,” it claimed. While key internal and external stakeholders had a "right to feel let down”, the bank claimed its "strategy and business model were right for Barclays before recent events, and they remain right for Barclays now”. It is hardly a reflection of contrition. Indeed, central to Barclays narrative is the argument that it had highlighted concerns on an ongoing basis to regulators in the United States that the Libor pricing mechanism was seriously flawed and these were not acted upon, either by Washington or London.
The TSC evidence yesterday did little to shed light on why that occurred other than the admission by Lord Turner that the FSA had at the time "a somewhat light touch regulation in particular in those areas of wholesale conduct”. He argued that he would now be "amazed if market abuse wasn’t more widespread” than that already disclosed in the Barclays settlement.
Who was and is gaming remains very much an open question that Judge Pollack would have relished disentangling. It is, however, not in the interests of any institutional actor for the Libor scandal to reach a courtroom. Expect only to see a raft of settlements in coming months and a wringing of hands at the absence of integrity. Multi-billion dollar fines are not, however, a substitute for justice, nor either is the prosecution of low level traders. Accountability demands more – much more. Without it the confidence required to oil the wheels of finance cannot be assured, and nor should it. We are destined to enter the casino at our peril. Caveat emptor indeed.
Justin O'Brien writes a column for The Conversation, The ethical deal, and is director of the UNSW Centre for Law, Markets and Regulation portal, where this story also appears. This story first appeared on The Conversation. Reproduced with permission.