1. LOMBARD - JONATHAN GUTHRIE
Glass-Steagallism prejudges impact of rate-rigging
By Jonathan Guthrie
453 words
11 July 2012
Financial Times
FTFT
London Ed1
18
English
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Terribly important to do things in the right order. Don your underpants before your trousers, for example.
Otherwise you give the impression you believe yourself to be Superman or a Lucha Libre wrestler. Similarly,
politicians need better evidence on the impact of Libor manipulation before they split investment banks from
commercial and retail parents, as many commentators are now proposing.
This is an unpopular view in the UK. The revelation that swaps traders at Barclays manipulated Libor lending
rates has induced convulsions in Westminster and the media. The spasm has been exacerbated by the actions of
Bob Diamond, former chief executive. He leaves with a pay-off of £2m. That is £2m more than he deserved, given
the value destroyed. Moreover, the frankness of Mr Diamond's testimony to lawmakers has been called into
question by the comments of other witnesses.
Lombard suggested a couple of weeks ago that rate-rigging would reinvigorate calls for a Glass-Steagall style
break-up of universal banks. So it has proved. Barclays is rightly seen as emblematic of the capture of a solid old
bank by amoral risk-takers. Swap traders exploited their access to Treasury staff within the model of a universal
bank to manipulate its Libor submissions.
It would still be advisable to calibrate one's outrage against an informed opinion of the detriment that corporations
and ordinary people might have suffered as a result of rate-rigging. While dishonesty is plainly bad, society's
response to it generally takes some account of its consequences. Pinning these down definitively may be hard
with Libor, where it could take years for regulators to expose a hinterland of wrongdoing at other banks. However,
organisations such as the Bank of England have a long history of measuring the nebulous. Rate-rigging should
get the treatment forthwith.
If the likely impact was modest, it would not preclude an outburst of Glass-Steagallism. The argument might be
that rate-rigging represents a final breach of trust between investment banks and the public. Certainly, the UK
government now looks misguided in planning to permit some derivatives transactions within the ringfence it is
imposing on the dealings of UK retail banks with individuals and small businesses. But politicians need to ponder
further shake-ups of banking dispassionately, given that the supply of credit to businesses and consumers
remains weak. The emotion surrounding Barclays is fuelling extrapolation from the particular to the general. The
dangers of that are obvious.
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