Bankers do their job ‘best’ when regulators ‘fail’ to regulate

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libor scandal house of lords
Bob Diamond before the Treasury Select Committee hearing into the Libor rate rigging scandal at Barclays. Photo – PA

The hearings conducted by the British parliament against Robert Diamond, the former CEO of Barclays, started on Wednesday where the goal was not to defend Barclays and its traders.

The stance taken by the disgraced CEO was to blame other banks that contributed or joined the malpractice and also blamed the regulators who had been avoiding or ignoring this issue for so long. The period under question is 2007-2009 when the world economy was already going through a tumultuous time. In these circumstances when the world of finance was seen with added skepticism, the issue of LIBOR manipulation should have had been uncovered. Reports from this time period show that regulators were made aware of this practice and still chose to ignore it. Ironically, Barclays was one of the institutions that warned the regulators that misquoting and understating of the rates was taking place in the market.

It seems that just like institutions are prepared to take excessive risk which is not mandated or allowed under current finance laws, the regulators also have a tendency to sleep at the wheel at the wrong time. The “if it isn’t broke, then don’t fix it” attitude has taken over the regulatory bodies as they do not want to jump into a situation when things are working.

There were warning signs before the crisis of 2008 and in this situation as well, however, regulators were happy sitting on the fence and letting the status quo prevail. The hubris that is practiced by both regulators and institutions involved shows the arrogance that prevails over the system. Just when the worst case scenario should be smack bang in the middle of their rear view mirrors, both sides still chose to ignore it. This shows that regulators have to share the blame for this situation and they should pay heed to the calls being made in the industry taking all possibilities into account.

The hearings have similarities to the 2008 crisis in the sense that it is not one institution again that was involved. Just like CDOs and CDSs were used by more than one organisation before 2008, the manipulation of the rates was also being carried out by institutions other than Barclays. In this situation, the involvement of more than one organisation is more blatant and obvious as collusion was required to reach a consensus when the rate was to be determined each and every day.

From the first hearing, it is becoming clear that just like scandals before it, the regulators have chosen a scapegoat and will use the people involved and the institution as a cautionary tale for the future. Similarly, even though other institutions are being investigated, still any chance of reform seems slim at this point of time. In the last few days, the events have a sense of déjà vu to them and it looks like a witch hunt would be carried out singling out Barclays as the institution to blame. As soon as they have served their disproportional punishment, the system would restart as it was. The other institutions involved would get a simple slap on the wrist with a few fines, punishments and voluntary firings by the firms themselves. There would be no reform on a broader level where finance laws are changed or new laws are put in place to save the investors from any such action in the future.

The biggest reality of the world of finance is uncertainty and based on the fundamentals of equilibrium, when things are going well, all actors should keep an eye on the reality that things can go bad. Asset bubble in the mortgage market in 2007, the crisis of 2008 and now the LIBOR scandal shows that the finance industry is losing sense of the reality that exists and should take into account the down trend in progress every once in a while.

The scandals in the past and now this one also show that it is not only one institution that takes an unfair advantage of the market, but other parties also join in only because the regulators do not do their job properly. This generalisation might sound as a little premature as the investigation is still going on. However, there is a hope that things will change, and that the role of the regulators will be identified and addressed.

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