LONDON – Fallen banking titan Bob Diamond on Wednesday described regulators on both sides of the Atlantic as partly complicit in a scandal involving the manipulation of a key interbank lending rate, telling a British parliamentary committee that government watchdogs had failed to act after his bank, Barclays, informed them of industrywide irregularities during the 2008 financial crisis.
The allegations highlight the relationship between financial institutions and regulators at a time when risk-taking and misdoings at big banks once again are the focus of heated debate in Washington, on Wall Street and in London. Diamond stepped down on Tuesday as chief executive of Barclays on the heels of a U.S.-British investigation that resulted in a $450 million fine for the bank for manipulating key lending rates between 2005 and 2009. The resignation ended the tenure of a legendary figure who brought a high-flying American-style culture to the bowler-hatted bankers of London’s financial district.
Barclays is only one of a number of global banks being investigated for tainting the credibility of Libor, the benchmark figure that largely determines the adjustable lending rates for U.S. credit cards, student loans and some mortgages. The emerging scandal has touched off a firestorm engulfing the London financial world, with Prime Minister David Cameron this week announcing a broader inquiry into banking standards that is set to haul some of the globe’s most powerful financiers before a parliamentary committee.
At the hearing Wednesday, furious British politicians seemed to put Diamond on trial as the Gordon Gekko character from the “Wall Street” films, blaming him for importing a Wall Street culture of risk and big bonuses to London. The 60-year-old American sought to defend his response to the Libor scandal, insisting he only learned last month about the extent of wrongdoing among an “abhorrent” but “small” group of 14 rogue traders at Barclays who had been manipulating rates for personal gain.
But Diamond also painted a picture of the bank’s accusers — government regulators — as being at least partially to blame. Documents released by Barclays on Tuesday said the bank had “raised concerns” with British regulators, the Bank of England and the U.S. Federal Reserve that other financial institutions were not being honest about interbank lending rates during the financial crisis.
Other banks, Diamond said, were routinely underreporting the rates at which they were borrowing, afraid that revealing just how high their costs had soared would spark an investor panic or government nationalizations. He seemed to suggest that regulators were content to see misreporting of interbank lending during times of crisis, when strict accounting of high rates could tighten lending even more, and only acting to curb such activity during less sensitive periods.
Asked how regulators responded to Barclays’ reports of widespread misreporting, Diamond responded: “Various levels of acknowledgment, but no action.”
In notes written by Diamond and released Tuesday evening, Barclays also disclosed a conversation between Diamond and the Bank of England’s deputy governor, Paul Tucker, that took place in October 2008. Tucker is said to have called Diamond to pass on the concerns of top British government officials over Barclays’ seemingly high Libor rates at the time, suggesting such elevated levels did not need to be as “high” as they were.
Diamond said Wednesday he never viewed the conversation with Tucker as a “directive” to artificially lower rates. Rather, he viewed it as Tucker flagging him to the rising political concerns over Barclays’ solvency only two days before it closed a major deal for new private equity. Diamond said his notes of that conversation, passed down to another senior official at the bank, were later misinterpreted to mean that British officials were effectively ordering Barclays to artificially lower its reported lending rates.
In addition, the 2008 period during which Diamond said regulators had looked the other way is distinct from the heart of the wrongdoing at Barclays or the manipulation of the lending rate between 2005 and 2007 and orchestrated by a group of traders to elevate their bonuses. .
Incredulous British politicians questioned Diamond’s assertion that the bank had acted as quickly as possible to investigate and contain the damage once it was uncovered. Given news reports in 2008 that suggested ongoing manipulation of Libor rates and Diamond’s own assertions that other banks were engaging in misconduct, they chided him for not digging deeper in his own organization to establish the truth.
John Mann, a lawmaker from the Labor Party, pointed out to Diamond that the Quakers who found Barclays had done so with the motto “honesty, integrity and plain dealing.” He then offered to have that statement tattooed on Diamond’s knuckles.
“You’re in charge,” Mann said. “People were suggesting impropriety. And you did not investigate it. Either you were complicit or you were grossly negligent or you were grossly incompetent.”