Barclays Bob Diamond Out: Will Jamie Dimon, Vikram Pandit Follow?

15 january 2013

The CEO of Barclays, Bob Diamond, is out of his job. But since the reason was alleged evidence of collaboration to fix the price of money, shouldn’t the CEOs of Barclays’ colluding banks be next to go?

The specific price of money involved here was the London Interbank Offered Rate (LIBOR) that is used as a base rate for setting interest rates for $350 trillion worth of financial products including credit cards and mortgages, according to DealBook.

I always find it interesting that when it comes to these corporate scandals, strenuous efforts are always made to pin the legal responsibility on someone way below the corner office in the corporate hierarchy.

But my experience working in large corporations suggests to me that aspirers for higher pay and power go to great lengths to follow the bidding of their superiors. Therefore, a mid-level manager would never decide on her own to engage in a price-fixing conspiracy with other banks.

Regrettably for Diamond, it appears that American and UK financial investigators got their hands on evidence suggesting that he was in the loop. According to anonymous sources quoted by DealBook, Barclay’s “top deputies told employees in 2007 and 2008 to report artificially low rates in line with those of rivals.”

The idea was that if Barclay’s LIBOR was higher than that of other banks, the higher rate would signal that Barclay’s was in financial trouble because it needed to pay a higher rate to get other banks to lend it money.

Unfortunately for the general public, the specific emails or other communications tying this alleged collusion to Diamond have yet to surface. But British authorities found that a Barclays manager had ordered an employee to lower his LIBOR submission “to send the message that we’re not in the shit.”

Nevertheless, Barclays agreement to pay $453 million as settlement of these allegations suggests that the evidence must have been strong enough to persuade Barclays’ attorneys that they would not be able to prevail in court.

The most surprising part to me about this LIBOR conspiracy is that rather than costing consumers money, it made rates cheaper for them. The real losers in this conspiracy were investors who bought loans based on LIBOR.

Charles Schwab (SCH) brought a lawsuit against 16 banks including Barclays, RBS, JPMorgan Chase (JPM), and Citigroup (C). Schwab hired experts who found that Barclays and its collaborators ”dramatically increased [the] collusive suppression of Libor” – agreeing to keep rates artificially low to the tune of having “a $45 billion effect on the market, representing the amount borrowers [the banks] did not pay” investors who bought their financial products, according to The Guardian.

Not surprisingly, this LIBOR scandal is a result of a lesson that evidently is unlearnable — just as students should not be grading their own exams, companies should not report on their financial performance.

As The Economist pointed out, regulators allow banks to estimate their own LIBOR rates. In theory, the bank is supposed to assign that calculation to a team that’s independent of the traders. But the investigations shows that they were influenced by Barclays’ traders.

For those who can’t remember, letting MF Global report on its customers’ cash balances at the behest of top management fueled its scandal. And, as I wrote in 2010, the Enron, WorldCom, Madoff, and Lehman Brothers scandals all pointed out a recurring flaw in the way corporations are regulated — we let managers write their own report cards.

If sufficient evidence surfaces that points Barclays-like fingers of culpability at Jamie Dimon and Vikram Pandit, perhaps the boards of JPMorgan and Citigroup will reach similar conclusions about the need to replace their CEOs.

But the real culprit here is a system of regulation that foolishly expects CEOs whose bonuses are tied to their financial reporting to do anything other than use their power to fit their firms’ financial reports to the magnitude of their greed.