FT's Gillian Tett: Libor scandal shows how banks use and protect opacity

In her Financial Times column, Gillian Tett looks at what the Libor scandal shows about how banks defend and use opacity for their benefit.

Regular readers know this activity was not limited to manipulating Libor, but extends into all the opaque corners of the financial system like structured finance and the 'black box' banks themselves.

Five long years ago, I first started trying to expose the darker underbelly of the Libor market, together with Financial Times colleagues such as Michael Mackenzie. 

At the time, this sparked furious criticism from the British Bankers’ Association, as well as big banks such as Barclays; the word “scaremongering” was used.

The first defense of opacity by the banking industry is always to attack.

This attack takes many forms, but ultimately comes down to the real problem is not opacity or the banks' behavior, but rather the individuals who suggests there might be a problem and their conclusion. As a result of their attack, the focus is shifted from looking at the banks to looking at the individuals and their conclusions.

Having experienced this first hand, I can say that the problem is opacity and not the individual who points out the bad behavior that banks engage in that is masked by opacity.

But now we know that, amid the blustering from the BBA, the reality was worse than we thought. As emails released by the UK Financial Services Authority show, some Barclays traders were engaged in a constant and pervasive attempt to rig the Libor market from 2006 on, with the encouragement of more senior managers. And the British bank may not have been alone.

Please re-read the highlighted text as Ms. Tett makes a critically important point.  Even the individuals who are attacked for identifying the bad behavior that is being masked by opacity tend to underestimate how truly bad the situation is.

No doubt some financiers would like to dismiss this as the work of a few rogue traders. And, in line with usual banking practice, the more junior authors of the incriminating emails have already been fired.

Please not that this was the first thing Barclays did after the fines for the Libor scandal were announced.

Your humble blogger observed then that this was grossly inadequate.  I did not call for anyone to be fired as this does not address why the response was inadequate.  The response was inadequate because Barclays needs to restore the idea that market participants can trust it.

The only way Barclays can restore trust is by providing ultra transparency and disclosing on an on-going basis its current asset, liability and off-balance sheet exposure details.  Without this level of disclosure, there is no reason to believe that Barclays will not see the fines simply as a trivial cost of doing business and carrying on as before.

But the wider symbolic significance of these revelations cannot be overstated; for they expose a big conceit at the very heart of the modern banking world. 

Most notably, in recent decades large investment banks in the City of London and Wall Street have increasingly wrapped their activities with an evangelical adherence to the rhetoric of free markets; whenever they have wanted to justify sky-high profits, wacky innovations or, most recently, the need to prevent a new regulatory drive, they have invariably cited the ideals of Adam Smith. 

But what the story of Libor shows is that this free market language has been honoured as much in the breach as the observance, to borrow Shakespeare’s phrase. And that was not just because a few Barclays traders were failing to “post honest prices”, as the emails admit. Instead, the real issue was that Libor was never organised as a proper market in the first place, which is precisely why the manipulation continued unchecked on such a wide scale for so long....

Let me restate Ms. Tett's argument:  banks talk a good game, but they don't practice what they preach.  They talk about free markets when it benefits them, but engage in practices that undermine the proper functioning of these very same capital markets.

The critical assumption underlying and the necessary condition for the proper functioning of the markets is that buyers have all the useful, relevant information in an appropriate, timely manner so they can make a fully informed investment decision.


Banks routinely engage in activities that prevent this from occurring.  


The example Ms. Tett focused on was how they arrived at the Libor interest rate.  Given the choice between basing Libor on actual trades or on make believe, the industry chose make believe.

If nothing else, this week’s revelations show why it is right for British political figures, such as Alistair Darling, to call for a radical overhaul of the Libor system. 

They also show why British policy makers, and others, should not stop there. 

For the tale of Libor is not some rarity; on the contrary, there are plenty of other parts of the debt and derivatives world that remain opaque and clubby, and continue to breach those basic Smith principles – even as bank chief executives present themselves as champions of free markets. 

It is perhaps one of the great ironies and hypocrisies of our age; and a source of popular disgust that chief executives would now ignore at their peril.