Bob Diamond resigns from Barclays amidst media pressure

3rd July 2012

The Nat West debacle was an irritant, but the latest revelations from Barclays may have finally rid people of the notion that the banks are improving or are worth saving.

To recap, Barclays has been fined $450m having been found guilty of manipulating Libor rates. The New Statesman gives this neat summary: "In 2005, traders in Barclays investment bank asked Barclays treasury function to report false Libor rates, in order to give their profits a boost. Barclays reversed this in 2007, and started deliberately understating their Libor rates, after they started to worry that high Libor rates were making it look risky in the wake of the run on Northern Rock."

Barclays' chief executive may now be ruefully casting his mind back to his comments to a Treasury Select Committee in 2011 : "If banks have bad management then they should be allowed to fail." He goes on to point out that strong regulation is needed to 'ensure that taxpayers never have to put money into the bank again.' There is no question that Barclays needs a bailout from the taxpayer at this point, but the taxpayer may have picked up the tab for its market manipulation.

The FSA has suggested that Barclays may not be an isolated case: "Tracey McDermott, director of enforcement at the FSA, which imposed fines alongside the US financial regulator, told the BBC: "We have a number of investigations that are ongoing."Obviously we need to look at each case on its own particular facts but the initial indications are that Barclays was not the only firm that was involved in this."

Other big names mentioned in connection with the investigation include Citigroup, JP Morgan, Deutsche Bank, HSBC and Royal Bank of Scotland.

This seems to support the argument that, in not letting weak banks fail in 2008, the UK is now saddled with banks that are not fit for purpose. The Darwinist survival mechanism of capitalism has not been allowed to work and we are left with an inadequate species as a result:  "A more subtle argument, often advanced here, is that by bailing out huge banks new financial institutions that may have a strategy that is more appropriate to a sustainable economy are crowded out, and find it harder to get established….

"The big snag with rescuing banks – and it is an argument that does not get aired sufficiently – is that capitalism is supposed to mirror how evolution works. Bad businesses are allowed to fail; bad practices lead to bankruptcy, and good businesses thrive. By bailing out banks we are effectively protecting a system that may no longer be appropriate for the modern economy."

A lot of commentators have also raised the moral question. Robert Peston, for example, says in his blog: "It's quite hard to think of behaviour by a bank as shocking as this: not telling the truth about what it is costing you to borrow, that then becomes a benchmark for pricing other deals." There are plenty in the online community who believe that bankers should be held to closer account on the behaviour. For example, Mr Awkward on the FT makes the reasonable suggestion that there needs to be a league table reflecting banks' disciplinary track record on a rolling five year basis: "Points would be awarded for sums paid in fines, settlement of regulatory action, level of sustained customer complaints, egregious losses due to poor controls and perhaps sums paid to tax authorities due to failure to comply with anti-avoidance codes."

Stephen Peak, fund manager at Henderson agree with this sentiment:

"We have yet another episode that demonstrates the disconnect between what most of us think is reasonable and decent behaviour and that which has taken place at the banks. When remuneration is added to the mix is not a surprise that we are entering another period of debate over the structure of and pay at banks. We think it inevitable that the pragmatic stance taken thus far will be stretched to breaking point and beyond – there will be more changes and regulation.

"The financials sector has proved to be very difficult to assess with the background of global and euro zone crises. These interbank rates' revelations begs the question "what next?" and make the task of assessing exposure for our clients more difficult, even impossible. Confidence in financial markets and the City was fragile, today it is unfortunately even more so."

This is all valid. But part of the problem in the UK is that the banks aren't currently seeking any money, so there is no sense that they can be 'cast loose'. They were a net contributor to UK tax revenues last year. The money has already been taken, and spent, and the UK Government is now in the process of trying to claw it back. The government is unlikely to try and dump all the bank shares that it owns on the market when sentiment towards the sector is still so bad and it costs it nothing to own them. That said, if the Barclays problem spreads to RBS or one of the other majority State-owned banks, the management team will need to have some good answers for its shareholders. Perhaps better than those Mr Diamond has given so far.

It is a different situation in Europe, of course and only time will tell if the Continental Europeans continue to feel inclined to support their ailing banks when they continue to behave with little regard for those who they are designed to serve.

 

More on Mindful Money

The end of economics as we know it

NatWest and RBS systems meltdown blamed on ‘offshoring' to Chennai

FSA to ban platform rebates – update

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28 thoughts on “Bob Diamond resigns from Barclays amidst media pressure”

  1. Anonymous says:

    The Spanish are past masters at disguising their financial woes. The cajas de ahorro in particular are still holding some pretty serious amounts of doubtful housing debt, no doubt encouraged by the government and its wish for future growth. If they are very lucky, this matter will remain under the counter until the economy improves, when it can gradually be filtered out. If not, they will have to reveal all in one go, which will be painful for all concerned (not just the Spanish, but other EZ countries, too) and will hit credibility once again.

    1. pavlo says:

      I have just returned from a couple of weeks in Tenerife and during this time I met up with a local friend who is a fairly senior banker and one who is not afraid to ‘tell it as it is’ – in private. If half of what he has told me is true (and I have no reason to doubt that 100% is true) then Spanish banks are sitting on really serious problems and as you say ‘disguising them’. I am convinced that the reason Spain does not want a bail out is that, in Greek style, they do not want auditors sniffing out the true position.

      1. Anonymous says:

        Hi Guys
        Yes I agree that there is plenty more to come from the Spanish banking sector. It is copying the tactic of the Irish banking sector which released bad news like notches on a rope.

  2. forbin says:

    Hello Shaun,

    a by note : I have notice that the current todays post has been disappearing lately – past few days its there for a while then when I reload ( and from two completely different machines, locations and architecture for that matter ) later that day the current post has gone and allI can see is the yesterday post !

    web gripes perhaps ?

    Later in the evening I may the todays post back ,

    Forbin

    1. Anonymous says:

      Hi Forbin
      Apologies to you and anybody else affected as there has been an issue over the past day or so. I did put a quick note on my Italy post which seemed to be solid. There are improvements being made to the IT basis of the site and to its presentation and as ever they have come with a glitch or two. So far today it is working fine and long may that continue!

  3. DaveS says:

    Agreed, austerity doesn’t work in our broken consumer economies – that is what Ed Balls is arguing now.

    But then what is the alternative ?

    You can try “demand stimulus” i.e. the government can spend more, run a bigger deficit in the supposedly short term. Of course the central bank will have to monetise it because letting interest rates rise will kill mortgage holders and consumer spending. You can build “infrastructure” -. lots of houses, roads, airports and whilst you spend GDP will go up. If you stop spending you have lots of houses and roads but GDP growth stops – so you can’t stop. Keynes doesn’t work in our unbalanced economies because we don’t produce enough – you are stimulating either foreign production or domestic non-exportable services. This wasn’t the case in the 30’s – anyway we will find out soon enough in the UK.

    You can try devaluation in the hope of boosting exports. But what are you hoping to export if you have decimated your manufacturing base ? You can’t compete with developing world wages for low end manufacturing – you probably don’t have the intellectual or financial capital to compete in high end manufacturing. Devaluing doesn’t help much if you have to import energy, raw materials and components. And if you devalue, then likely all your competitors will too. Still Mervyn seems to think its worth a shot,

    And if you devalue by printing or by other means. you will get inflation. Real incomes drop, consumer spending drops, confidence drops. You decimate savers who should be providing the capital to restructure and if you artificially keep interest rates low then foreigners won’t invest either. That means no capital – just QE..

    Finally you can default on the debt – both government and bank debt – although their is almost no distinction any longer. If we have a domino chain of bank defaults then more than likely we will have a domino chain of sovereign defaults. And remember we aren’t just defaulting on the foolish foreigners – the majority of that debt is owned by us – we are defaulting on ourselves too – that means massive wealth destruction.

    Part of me thinks we should default and be done with it. The ensuing crisis is perhaps the only chance we have to reset the global economy. However none of us can predict what would happen if much of the West defaulted. We have no idea what the world would look like afterwards and whether the West would ever be able to recover. It would be a massive gamble.

    Of course I believe, default in inevitable, they are just stalling by choosing inflationary soft default. I don’t have kids so maybe I just have to hope they can stall as long as possible…..

    1. Justathought says:

      Hi Dave S,

      This is maybe the real issue behind all the actual events,if it is the case we are going for a real and long bumpy road…

      http://www.youtube.com/watch?v=Bi9yOprEHkU&list=FLlaN8Nd3IWVuwk7vBgCvIKw

      1. DaveS says:

        Hi Justathought

        Well – I listened to a bit of that – I agree that oil will be the problem – in my view it will be an oil shock that will derail the central bankers and their inflation plans.

        I am afraid I don’t believe in any market conspiracy theories and I certainly don’t believe in abiotic oil. We are not awash with oil – its severely constained – if you look at EIA stats here then its obvious

        http://www.eia.gov/cfapps/ipdbproject/iedindex3.cfm?tid=50&pid=57&aid=1&cid=&syid=2004&eyid=2012&freq=M&unit=TBPD

        Crude oil production has gone up by just 2% since 2005 from around 74M barrels to 76M barrels. The growth has been in natural gas liquids and “other” – these are more expensive to produce and have lower energy density (so you can’t just look at volume numbers). That is why prices have gone up even in the midst of recession.

        In my view this is the elephant in the room that central bankers certainly don’t understand.

        1. forbin says:

          Hello DaveS.

          Yup oil is the issue and as an Oil hand said – “OK, I’ll beleive in your abiotic oil – where do I drill for it ? ”

          Doesn’t matter how you think oil is produced – you need traps for it to collect in – I believe that much oil produced in the earth has escaped ( heck think of braer tar pits or beverly hill-billies if yer like ) or been partially oxidized to make tar pits or whats called “heavy oil ” or not cooked enough to make oil and called kerogen.

          there’s been an inflection point around 2002-2005 – much of today’s financial woes are due to this ….

          Forbin

          1. DaveS says:

            Yes, in truth I believe we are in an energy crisis.

            The history of capitalism is a progression of financial bubbles and busts but always in the context of ever increasing energy supplies. I think that is about to change and that is why this time it really will be different.

            They can inflate debt away but they can’t create energy and our wealth is really a function of surplus energy.

            Anyway its a religious debate – you either believe it will get solved or you don’t – I’ll resist polluting Shaun’s economics blog with an energy debate !

          2. forbin says:

            perhaps just not oil either – copper ,steel ,concrete, all being sucked up by the 600lb gorillla in the room – China

            then there’s the low wages work force

            frankly add that to the debt bubble and we’re really stuffed in the west – unless you’re Canada and Australia – but do they realize they are selling their inheritance ?

            all quite “interesting times”

          3. Anonymous says:

            Hi DaveS
            It is a big question and its a shame it gets so polarised. But in many ways our future will be decided by what happens on the energy front. I ‘ve always thought it a shame that we use oil for energy when it has plenty of other uses so I hope that something like thorium or cold fusion comes up trumps and soon.

          4. Anonymous says:

            Hi Shaun,

            Another facet of an energy crisis is the electrical generating infrastructure. for example France gets 70% power from nuclear and the average reactor age is approaching 40 years. The decommissioning costs and replacement costs are huge and the French govt financial position is dubious without this extra burden. the same can be said for British reactors, whether we can convince private investors to build them and supply affordable electricity is an open question. We’ve previously discussed an impending energy crunch in Germany – 2023 when they complete their nuclear shutdown.

            This will have knock on affects in these economies.

          5. Patrick says:

            Isn’t India sitting pretty, on top of the earth largest Thorium deposits? (With the research well under way to exploit it…)

  4. Anonymous says:

    The UK should sell RBS to the highest bidder, as Maggie once said “it’s losing money, any price is good”. Failing that just make RBS insolvent, and cut the taxpayer’s losses ….

    Copy Iceland, it’s a more successful approach than the Eurozone bank rescue plan.

    1. Anonymous says:

      Hi ExpatInBG
      If we go back to the beginning I would have started that policy with Northern Rock and often wonder if its position as a major employer in the North East helped save it. However we are where we are and the UK taxpayer has wrapped an implicit guarantee around it so rather than the current messing around where we have 83% of the capital and 68% of the votes it would be preferable to nationalise it and then break it up.
      The catch is the price as I think that there is a danger of the taxpayer again over paying for RBS shares.
      Meanwhile in faraway fantasyland places like the Sunday Times are talking of selling it off which means taking a loss (they fantasise a profit) and the threat of being sued for misselling as the truth about its position emerges. I still fear it has no value….

  5. Jim M. says:

    Hi Shaun…

    Might I propose that “cleansed soured assets from its balance sheet.” is worthy of a place in your ever-expanding Lexicon.

    It sounds so much nicer than an after-tax loss of 20 odd billions!*

    *Sterling, Euros, Dollars… does it much matter anymore?

    1. Anonymous says:

      Hi Jim
      I do agree that it evokes images of emerging from the shower feeling refresh after have had a good wash. Sadly it has a misselling scandal to come after the sale of its bonds to retail investors and maybe on its rights issue too and of course it is locked into a still falling property market. What could go wrong?

      1. Patrick says:

        If you then figure in that the ‘showerer’ was standing in 2 feet of dirty water, full of drain backup due to being clogged with all the bad stuff…

        (Sorry about that image!)

  6. Anonymous says:

    Shaun,
    Bonuses still being paid at RBS on basis of higher operating profit – just those pesky fines obliterating it ?

    1. Anonymous says:

      Hi Chris
      The fines and other issues took RBS into negative territory which is bad enough. But the major issue or -£4.65 billion was something I have discussed on here before as being one of the alchemies of alchemies and I discussed it in relation to Barclays making profits from it.
      Banks issue bonds so lets say bond one at 100. If it falls to 60 in price because they are doing badly they can book the 40 (100-60) as a profit. Except as things are less bad for RBS this acted the other way and created a loss. This sort of thing should not be in the profit and loss in my view and belongs on the balance sheet.
      Or as perception improves you make less profits. Hmm I would bin that!

  7. James says:

    Great post as always. In looking at the RBS results, I did try to understand the credit adjustment (amounting to a cost of £4.6 billion). I am a qualified accountant and am therefore used to bonkers rules affecting results, but this really takes the biscuit.

    As I understand it, the mark to market rule for assets (ie the rule that you take the listed value of a share/bond etc on the balance sheet date and take the gain as a profit or loss) is extraordinarily applied to the bank’s own debt instruments. Instead, therefore, of just recording a bond at par as it will have to be repaid at par, you look at the quoted value and take the difference from last year as a gain or loss through the profit and loss account.

    This means that:

    1. When your credit rating gets better, you take a loss, as the bonds of a given yield are quoted higher, which means a bigger liability on a mark to market basis

    2. When your credit rating gets worse, you make a profit.

    You could not invent it…please tell me that I have missed something here!

    1. Anonymous says:

      Hi James

      No and I had just given that as an answer to Chris and now wish I had read yours first and simply referred to your reply.

      As you know I like to use music. So let me hand over to the nutty boys

      “Madness, madness, they call it madness
      Madness, madness, they call it madness
      I’m about to explain
      A-That someone is losing their brain”

  8. Paul C says:

    Hi Guys, as Shaun points out there’s little truth in the numbers from Spanish Government or Banks.

    I note the thread turns towards energy and oil, I’ve watched enough “end of the world is nigh” youtubes but if you want some thought provoking economic forecasting read the tullet prebon “perfect storm” forecast. It floats the concept of EROEI or energy return on energy invested and that curve is unavoidably DOWN which means it does much matter what kinds of “new fossil fuels” are discovered, their EROEI is too high (including shale).

    It puts our current bursting bubble in context and can let your mind soar above the media reporting of Spanish Economic reporting.

    :-)

    Paul Chadwick BSc Econ

    1. Doubting Dick says:

      I read it – frightening stuff, decided to continue burying my head in the sand. The alternative would be to buy a small holding in mid-wales and a gun!

    2. PT73 says:

      It is an interesting and troubling Article. They have an office in the same building, but I haven’t heard any glass breaking as they take to the windows.

      I heard the term Abiotic Oil for the first time the other day – and while I’ve read very little about it so far, my initial reaction was that it sounded both too good to be true, and more than a little like crackpot science.

      Anybody here have any opinions on its credibility? http://en.wikipedia.org/wiki/Abiogenic_petroleum_origin

  9. Andy Zarse says:

    “(and perhaps there were hopes that no-one was looking)”

    Shaun, you owe me for a dry cleaning bill, I spat seafood linguini all over my trousers when I read that.

    1. Anonymous says:

      Oh dear,my apologies to your trousers.

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