As each hour passes, the LIBOR fixing scandal gets murkier. The day started with Bob Diamondâ€™s resignation without even the slightest hint of an apology in hiss statement. As the day has gone on it appears that Barclays are determined to take everyone else down with them. They have released a potentially explosive Note dated 29 October 2008 which records a telephone conversation between Bob Diamond and Paul Tucker, the deputy Governor of the Bank of England.
There are four parts of the Note which call for further investigation. Firstly, the Note indicates that Bob Diamond informed Mr Tucker that â€˜not all banks were providing quotes at levels that represented real transactionsâ€™ and that he asked that this be relayed to Whitehall. This suggests that the Bank of England were made aware of LIBOR fixing more than 3 years ago. Whether they investigated this further and if not why not and whether Mr Tucker did as requested and passed on this information to government are both matters of importance.
Secondly, in the same paragraph Bob Diamond is keen to emphasise that the reason that the Barclays LIBOR return is â€˜always at the top end of the LIBOR pricingâ€™ is because â€˜you have to pay what you have to payâ€™. Diamond contrasts this with the position with the other banks. The strong implication of this is that Diamond is representing that Barclays LIBOR rates at this point in time were not being fixed. This does not sit very easily against the time that Barclays have supposed to have been involved in LIBOR fixing which according to the FSA is between 2005-09. Was Bob Diamond misleading the Bank of England or was he unaware of the practices in Barclays at the time?
The third and fourth points are the most intriguing. They are both found in the last sentence. Mr Tucker says to Bob Diamond that: â€˜it did not always need to be the case that [Barclays] appeared to be as high as recentlyâ€™. Plainly Mr Tucker and the Bank of England needs to explain what was meant by this but on first appearances at least it looks in the context of the rest of the email as if the Bank of England were suggesting that Barcalys report figures for LIBOR other than the true market price.
Finally, there is the part upon which most attention is now going to be focused: the reference to the â€˜seniorâ€™ Whitehall calls that Mr Tucker has been receiving about the LIBOR issue, which is the apparent prompting for the call with Diamond. Is this a reference to senior civil servants (presumably in the Treasury) or Ministers. Lord Myners, who was so eloquent in his criticism of Barclays when the LIBOR story first broke, was City Minister at the time. Ed Balls was Secretary of State for Education (so seems an unlikely source). Alistair Darling was Chancellor. Liam Byrne was Chief Secretary to the Treasury.
Plainly, this needs to be investigated further and at very minimum Mr Tucker needs to be questioned about this memorandum and the pressure he was under from â€˜senior sourcesâ€™ in Whitehall.Â The release of the memorandum raises serious questions about the complicity of the Bank of England and the last government about LIBOR fixing. Now it maybe that the explanation is that October 2008 was at the height of the financial crisis and the Bank of England and the Government were seeking the assistance of the banks to provide a falsely healthy picture of those very banks to the market in order to prevent financial meltdown â€“ a high LIBOR rate suggests that a particular Bank is struggling to obtain finance in the inter-bank market. It is not unknown (and not necessarily entirely illegitimate) for the Bank of England to provide confidence boosting misinformation to the market.
This, of course, does not explain why LIBOR was being fixed by the banks in the period prior to the financial crisis and should not be allowed to become the sole focus of any further enquiry. However, it does need to be thoroughly investigated and the extent of the complicity in rate fixing needs to be understood. The current government proposal of this being undertaken by a Parliamentary Committee is wholly inadequate to the task.
The banks have already brought the global financial system to the very edge of collapse in 2008-9. Add to this the revelations on LIBOR fixing, which may represent the biggest fraud the world has ever seen. The total value of contracts affected by LIBOR based interest rate setting is an almost unimaginable $504Tn. Then there is the recent revelations of the mis-selling of LIBOR based interest rate swap financial products to businesses.
Far more than the inter-relationship between politics, police and the media, the recent behavior of the banks and the culture of the banking industry cries out to be the subject of forensic investigation. There needs to be cross-examination, evidence on oath, disclosure obligations and ultimately if enough evidence is found prosecutions. MPs and Select Committees are not sufficiently equipped, either in skills, resources or frankly the will, to get to the rotten core of the banking system.
As anyone who heard George Osborne this morning on the Today programme will depressingly know, the governmentâ€™s line will be that this is all the fault of Gordon Brown and Ed Balls. It has once again revealed the lack of seriousness in the government, despite everything, to cleanse the banking system of the disastrous and damaging culture that currently exists. Â They instead see it as a cheap political game. Â The so called â€˜light touchâ€™ regulation of the banks in the Blair Brown years was indeed folly of the first order, but let us not forget that even as Northern Rock was going under, the Tories were calling for more de-regulation. Â Perhaps no surprise when 50% of Tory party funds come from City sources.
Nor is the fact that a judicial Inquiry will take longer an adequate objection. Â These are matters of the utmost seriousness and call for proper scrutiny not a few quick grandstanding sessions by a select committee and then a report dividing on partisan lines, like the Culture and Media Select Committee report over phone hacking. Â That naturally takes time, as Leveson is showing. Â But on any view a judicial Inquiry will be over considerably before the government implements the Vickers recommendations, which it has punted off until 2019.
The case for a judicial inquiry is overwhelming. Ed Miliband is right to push for it no matter how uncomfortable it would ultimately prove for former Labour Ministers.