What We Learned From The Bob Diamond Testimony

Bob Diamond appeared before the Treasury Select Committee of the British Parliament today. While some MPs had more than a reasonable banking knowledge and asked some good questions, both sides came up short. Here is why along with some general observations.

Where MPs Came Up Short

MPs still suffer from derivatives derangement syndrome and a total misunderstanding of investment banking. Diamond had to remind MP Pat McFadden that Halifax, HBOS, Alliance & Leicester and Northern Rock all collapsed and they had nothing to do with derivatives and the riskiness of investment banking.

Following on from the above, it appears that MPs, along with the rest of the population do not realize that loans involve risk taking and that losses do not only come from derivatives or “casino” banking—a most unbelievable notion. Until MPs and regulators fully understand the dimensions of risk they should forego any decision to change the structure of the industry.

MPs clearly did not understand the role of investment banking in the management of risk for ordinary borrowers. A power company might take on a loan and at the same time hedge its exposure to commodity prices. Separating retail/corporate from investment banking will not obviate the need for ordinary borrowers to avail themselves of the services and skill sets of both.

Politicians are using the issues arising from the problem at Barclays to advance the split between retail and investment banking even though the issues are in no way related. For example, one MP supported their attack on Barclays by drawing attention to previous misdemeanors such as the mis-selling of PPI and breaking of sanctions on Cuba and Iran. Diamond pointed out that those misdemeanors had nothing to do with the investment bank.

MPs are in need of a basic course in derivatives.

MPS are in need of a basic course on the true causes of the financial crisis.

Unbelievably, one MP, Thurso, did not understand the difference between the submitted LIBOR rates, which will differ by a few basis points (0.01%) and general interest rates which are in terms of whole percentage points with the base rate being sent by the Bank of England. This led the MP to suggest that Barclays’ manipulation of the LIBOR rate had a significant impact on businesses. What is this MP doing on the Treasury Select Committee?

The MPS clearly did not understand that in very large and complex organizations it is almost impossible for a CEO to be hands-on on all issues. Things do happen.

One MP believed that the primary duty of auditors and compliance officers is to spend their time finding and rooting out fraud. Someone needs to explain to that person that not only is that not how it works but that such an approach would be the worst possible use of their time.

There was great interest in Bob Diamond’s bonus. MPS drew attention to the fines and losses in the share price since the LIBOR scandal broke but not the value actually added since Diamond took over the reins of the bank. Typical.

Where Bob Diamond Came Up Short

Bob Diamond did not or refused to admit that the culture and values within Barclays are underdeveloped or even poor given the fact that wrongdoing took place, it involved several people, and that no one was suitably motivated to report it.

Bob Diamond refused to admit that the culture and values were his responsibility as CEO. He failed to acknowledge that the manipulation of the LIBOR rate was not just a disease but merely the symptom of a wider malaise.

Bob Diamond did not or refused to accept that if there were discussions in the market about the manipulation of the LIBOR rates by other banks, then it should have been incumbent upon him or at least place him on notice to determine what appropriate controls were in place at Barclays. His response does not seem credible.

According to his own testimony, Bob Diamond passed on communications from the Deputy Governor of the Bank of England to one of his senior people on the issue of LIBOR rates and he never followed up to find out how the issue was dealt with. His response does not seem credible.

General Observations

There are two aspects of the LIBOR fixing. The first resulted from the actions of a few rogue traders. The second resulted from the financial crisis and the liquidity crisis which accompanied it.

It is quite likely that the government of Gordon Brown was involved in the latter manipulation of the LIBOR rates.

The public’s view is that they don’t care what the real reasons surrounding these scandals are. As far as they are concerned banks are just bad and it does not appear that they have any interest in changing. This is not good for the industry as it means that the remedies proposed, more regulation etc., will do nothing for the problem while presenting the industry with more headaches.

The limitations of governance and controls functions such as compliance and audit have once again been cruelly exposed. The failure to recognize these limitations will continue to cause major headaches for all involved both inside and outside organizations.

The revelations from other banks might be even more interesting.

There is generally no clear understanding of what is needed and what is necessary to transform the culture and values of organizations.

The next article will specifically address this latter point.

Jonathan Ledwidge is the author of the book Clearing The Bull: The Financial Crisis and Why Banks Need a Human Transformation. Use this link to give your opinion on the performance of banks post the financial crisis.

Advertisements

2 responses to “What We Learned From The Bob Diamond Testimony

  1. Since the top fur and bottom four Libor submissions are taken out of the equation, Barclay’s low-balling of the rates would only make a difference if the majority of the Libor submitters were in on this.
    You are right about them needing training on swaps. They forget that a bank is fa factory, like any other business. When a swap is executed, the risk is laid off (simplistically – traders can have open positions within market risk limits) and the bank takes its bid/offer spread. When the swap is terminated, any cost or even benefit to the client reflects the market value of the swap and the cost of replacing that position at prevailing market rates. The termination fee is not all for the bank and some outsiders wrongly assume this is pure profit.
    Mis-selling has definitely gone on, where RMs do not know how swaps work and fail to offer alternatives (such as caps) or show payoff diagrams and explain the possible consequences of early termination. A friend of mine in the UK, an estate agent, was offered a £1mm loan by RBS bit only on the condition he did a swap. No swap, no loan. this is simply wrong.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s