Saturday, June 30, 2012

UK regulator: banks were 'unethical' in years leading up to crisis

As Harry Wilson of the Telegraph reports, Martin Wheatley, the head of financial conduct at the Financial Services Authority,

has branded the conduct of banks in the years running up to the crash as “unethical”, saying that in many cases staff at major lenders did not understand the products they were selling or that they might harm their customers.... 
Britain has been left with a “big problem” as a result of what he described as the “back book legacy” of the banks actions in the boom years. 
“I think the banks suspended normal ethical standards and were selling products that were profitable for the investment banks, not well understood by the banking staff that were introducing them, and not at all understood by the customers who were buying them,” he said.
Last week, the FSA announced a settlement with Barclays, HSBC, Lloyds Banking Group and Royal Bank of Scotland over the mis-selling of interest rate hedging products to small business customers. Compensation could reach as much as £6bn, according to one law firm..... 
Mr Wheatley, who takes charge of one of the FSA’s two successor organisations next year, also admitted that the FSA had “conflicting objectives” when dealing with banks.
It is refreshing to hear a regulator confess that they have 'conflicting objectives' when dealing with banks.

Regular readers know that it is the existence of these 'conflicting objectives' that makes it mandatory that banks be required to provide ultra transparency and disclose on an on-going basis their current asset, liability and off-balance sheet exposure details.

With this disclosure, at least one major source of conflicting objectives is removed from the bank supervision process.

With this disclosure, sunlight can be used as the best disinfectant for unethical behavior.

Will Bob Diamond have Barclays provide ultra transparency to silence critics

Prior to his appearance before the UK Treasury Select committee to talk about the Libor Scandal and mis-selling of derivative products to small businesses, will Bob Diamond have Barclays provide ultra transparency in a bid to regain the market's trust and show his firm has nothing to hide?

Absent a willingness to provide ultra transparency and show that Barclays understands good corporate citizenship and can stand on it own two feet, why should anyone believe what Mr. Diamond says about addressing the culture that gave rise to lying and mis-selling?

As your humble blogger has previously said, firing Mr. Diamond does nothing to address a culture built on profiting from and protecting opacity.  In fact, firing a few traders and Mr. Diamond is nothing more than an opacity protection mechanism.

I realize that Mr. Diamond's appearance before the committee provides politicians with the opportunity to bash him.  While that makes for good theatre, the public is not interested in theatre.  Rather it wants real reform.

The first step on the way to real reform would be to focus on the opacity in the Libor rate setting process and how that made it easy to manipulate the rate.

The second step on the way to real reform is to point out how the changes that Barclays has made do not prevent the type of manipulation that occurred when Barclays was concerned about its own survival.

The third step on the way to real reform is to point out that it is only by disclosing all of the trades that Barclays uses to fund itself that it can prevent manipulation of Libor in the future.  The question is why hasn't Barclays already agreed to do this?

Telegraph's Liam Halligan adds voice to call for 'genuine bank reform'

In his Telegraph column, Liam Halligan points out the need for reform of the banking system and how the reforms being proposed so far are inadequate.

Regular readers know that the reason the reforms are inadequate is that they do not address the issue of opacity in the financial system.

If you do not address opacity, you do not get the banks to recognize their losses and remove the burden from supporting the excess debt in the financial system from the real economy.

If you do not address opacity, you do not change the culture of banking which uses opacity to hide its bad behavior.

If you do not address opacity, you continue to erode confidence in the financial system that is necessary for investors to return to worrying about the return on their investment and not just the return of their investment.

Around the eurozone’s neck continues to sit the crippling bank-sovereign “doom loop”. Debt-soaked banks are dragging down fiscally-precarious states, the resulting high yields then stymieing growth, making bank balance sheets look even worse. 
The circle will only be broken, of course, once politically-connected banks are busted up and their creditors forced to take losses. This has yet to happen in Western Europe - and, until it does, we’ll keep lurching from crisis to crisis. 
And then there is the UK. Last Wednesday, Barclays was fined £290m for conspiring to fix global interest rates. The manipulation of Libor has cost consumers, businesses and investors tens of billions of pounds. 
Although Britain sits smugly outside the eurozone, our banking predicament is even worse. Why? Because the UK’s banking sector is absolutely enormous, with balance sheets totalling more than four-and-a-half times’ annual GDP. In proportionate terms, this is more than seven times the size of all US banks. 
Amid a growing sense of national outrage, David Cameron says that addressing the Libor scandal is “frankly, as vital as dealing with the unsustainable debts left by the last government”. 
It is not “as vital”, Prime Minister. It’s part of the very same problem.
Britain’s banks are, quite clearly, out of control. The Government hasn’t even got the guts to implement the extremely weak “Vickers reform” - which supposedly set up a firewall between investment and commercial banking. 
Well, history shows that firewalls don’t work, which is why we desperately need a proper “Glass-Steagall” split. Unless we get one, then the on-going use of ordinary deposits to finance investment bankers’ bets will result in yet more UK bank bail-outs. 
Given the rescues we’ve seen so far, and the gargantuan size of our bloated banking sector, this is something the UK simply can’t afford. 
If the combination of the eurozone “doom-loop” and “Libor-gate” aren’t enough to galvanise our politicians into imposing genuine banking reform, then I really do despair for the future of my native country.

Does Ed Milibrand support requiring banks to provide ultra transparency?

The Telegraph reports on a speech given in response to the Libor Scandal and the Small Business Interest Rate Swap Scandal by UK opposition leader Ed Milibrand.

"I've got a message for David Cameron: the British people will not tolerate anything less that a full, open, independent inquiry," Mr Miliband said. 
"The British people will not tolerate the establishment closing ranks saying we don't need an inquiry. 
"They want a light shone into every dark corner of our banking system. They want bankers held to account. They want the system rebuilt. 
"Nothing less than a full public inquiry can do that. Sticking-plaster solutions will not heal this wound."
In calling for a light shone into every dark corner of our banking system to hold the bankers to account and rebuild the system, Mr. Milibrand is effectively calling for requiring the banks to provide ultra transparency.

Under ultra transparency, the banks are required to disclose on an on-going basis their current asset, liability and off-balance sheet exposure details.

With this disclosure, market participants can see what the banks are doing and exert discipline on the bankers.

As everyone knows, sunlight is the best disinfectant.

RBS's Stephen Hester: bankers were "masters of the universe when they should have been servants to the customers"

In a Telegraph article, RBS's Stephen Hester observed

the banking industry "almost got separated from society" and that its culture needs a massive overhaul. 
"People thought they were masters of the universe when they should have been servants of the customer," he said. 
"These issues are illustrative of a culture in banking that before the crisis got to the wrong place, and I came out of another industry back into banking three and a half years ago, and my mission is to change RBS for the better, physically and culturally."
Regular readers know that the banking industry got separated from society when it based its business model on profiting from opacity.

If Mr. Hester were serious about changing RBS for the better, physically and culturally, he would be the CEO that leads the banking industry by adopting ultra transparency.

By disclosing on an ongoing basis RBS's current asset, liability and off-balance sheet exposure details, Mr. Hester gets two benefits.

First, the bright light of sunshine in all the opaque areas of finance that RBS is involved in will act to change the culture as all financial market participants know that sunlight is the best disinfectant.

Second and equally important, it allows Mr. Hester to make a statement that going forward RBS is a bank that can be trusted.

David Cameron calls for cleaning up 'shoddy' UK banks

The Telegraph reports that David Cameron has called for cleaning up 'shoddy' UK banks.

Regular readers know that there is one tried and true way to clean up the 'shoddy' UK banks and that is to require them to provide ultra transparency and disclose on an on-going basis their current asset, liability and off-balance sheet exposure details.

As all financial market participants know, sunlight is the best disinfectant.

It is time to use ultra transparency to disinfect the UK banking system.

Your humble blogger would like to offer his firm's service to coordinate the development and on-going operation of a data warehouse to facilitate shining sunlight into the UK banking system.  While the day to day operation of the data warehouse will be run by a large information technology firm, my firm specializes in transforming the data that will be collected into usable information.

Below are excerpts from the Telegraph article.
David Cameron has said that cleaning up Britain’s discredited and “shoddy” banks is a priority for the Government on a par with cutting the country’s debts.
If it truly is a priority, I can assure him that should he reach out today, we can begin the process of bringing sunlight to the UK banking system today!
The Prime Minister expressed his anger after the four biggest high street banks — Barclays, HSBC, Lloyds TSB and the Royal Bank of Scotland — admitted culpability in the selling of punitive financial products to thousands of small businesses. 
Sir Mervyn King, the Governor of the Bank of England, condemned the “shoddy treatment of customers” and “deceitful manipulation” which he said characterised the culture at leading banks....
On Wednesday, Barclays was fined a record £290million after it admitted conspiring to fix global interest rates. The manipulation of the Libor rate is thought to have cost consumers, businesses and investors up to £30 billion. 
Today The Daily Telegraph discloses that the fixing of the Libor rate may mean the banks milked the taxpayer for hundreds of millions of pounds as they manipulated the fees they paid for government assistance in 2008 and 2009.
Please re-read the cost to the taxpayer of manipulating the Libor rate.

The cost of implementing ultra transparency pales by comparison.
Ed Miliband, the Labour leader, demanded an independent inquiry into the conduct of the banks. Mr Cameron rejected his calls but said it was vital that regulatory and criminal investigations went “wherever the evidence leads” and held those responsible to account “without fear or favour”. 
Why not have the independent inquiry?

We did not have a Pecora Commission after the beginning of the financial crisis.  As a result, the reforms that have been suggested to date would not have prevented the financial crisis, the Libor Scandal nor would they have change the culture of the banking industry.

If you are serious about reform, you have to be serious about investigating the causes of the problem in the first place.

Your humble blogger and Joseph Stiglitz would suggest that at the top of the list for causing the problems the financial system encountered would be opacity.

Opacity both allows the bankers to engage in detrimental activity and allows a culture that thinks bad behavior is acceptable to thrive.
“Dealing with this whole issue is vital for the Government; frankly it is as vital as dealing with the unsustainable debts that we were left by the last government,” he said. 
“We know what needs to be done so let’s get on and take those actions. I think the most important thing people want to see is a really concrete set of actions that will help change the culture.”...
There is only one concrete action that people believe will change the culture and that is to require the banks to provide ultra transparency.

The BIS reminds us that the bank financial statements are meaningless

In his Bloomberg column, Jonathan Weil looks at the BIS report calling for banks to recognize all the losses hidden on and off their balance sheets.

The Bank for International Settlements, which acts as a bank for the world’s central banks, should know fudged numbers when it sees them. What may come as a surprise is how openly it has been discussing the problem of bogus balance sheets at large financial companies. 
“The financial sector needs to recognize losses and recapitalize,” the Basel, Switzerland-based institution said in its latest annual report, released this week. “As we have urged in previous reports, banks must adjust balance sheets to accurately reflect the value of assets.” 
The implication is that many banks are showing inaccurate numbers now.....
The inaccurate numbers are the direct result of the policymakers and financial regulators adopting the Japanese model for handling a bank solvency led financial crisis at the beginning of our current financial crisis.

Under the Japanese models, policies are adopted to protect bank book capital levels.  For example, regulators pursue regulatory forbearance which allows banks to keep zombie borrowers alive using 'extend and pretend' practices.
“The challenge is to provide incentives for banks and other credit suppliers to recognize losses fully and write down debt,” the report said. “Supporting this process may well call for the use of public sector balance sheets.” 
So there you have it. More than four years after the financial crisis began, it’s so widely accepted that many of the world’s banks are burying losses and overstating their asset values, even the Bank for International Settlements is saying so -- in writing. (The BIS’s board includes Federal Reserve Chairman Ben Bernanke and Mario Draghi, president of the European Central Bank.) It fully expects taxpayers to pick up the tab should the need arise, too.....
Bailing out banks is another Japanese model policy.  While great for payment of banker bonuses, it completely ignores that banks in a modern banking system do not need to be bailed out.

With deposit insurance and access to liquidity from a central bank, a bank can operate for years with negative book capital levels and support the real economy.  While it is operating with negative book capital levels, the bank retains 100% of pre-banker bonus earnings to rebuild its book capital levels.

Since Ben Bernanke sits on the BIS Board, does this mean he endorses the idea that US banks should recognize all the losses hidden on and off the US banks' balance sheets?
The BIS report got this much right: The lack of transparency and credibility in banks’ balance sheets fuels a vicious cycle. When investors can’t trust the books, lenders can’t raise capital and may have to fall back on their home countries’ governments for help. This further pressures sovereign finances, which in turn weakens the banks even more. The contagion spreads across borders. There is no clear end in sight.
Please re-read the highlighted text as Mr. Weil lays out why policymakers and financial regulators need to adopt the Swedish model with ultra transparency.  It ends the cycle of governments needless wasting their scarce access to funds on bailing out the banks.  It makes banks' balance sheets transparent and restores confidence.

Friday, June 29, 2012

Mervyn King calls for basing Libor off of actual trades

As reported by the Wall Street Journal,
Mr. King said Friday that the process of using quotes to calculate Libor should be replaced with a system in which actual transaction prices are used instead.
Regular readers know that your humble blogger proposed this solution some time ago.

The question now becomes how to do this in a transparent way.  The easiest way is to require the banks to disclose all of their wholesale trades as I have recommended under ultra transparency and then let the market select which trades to include in calculating Libor.  

This not only restores confidence that Libor actually reflects what is happening, but also prevents future manipulation.

Just like the structured finance data warehouse, nobody will trust the data from a "Libor" data warehouse if the banks control the data warehouse.

Since my firm has the expertise to run a trusted "Libor" data warehouse, it is a natural for coordinating and overseeing the day to day operation of a conflict of interest free "Libor" data warehouse.

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.

Bank of England Governor Mervyn King attacks 'deceitful' banking culture

As reported by the Telegraph,

The Governor of the Bank of England has launched a scathing attack on “deceitful” investment banking and called for a “real change in the culture of the industry” stretching right to the top, in the wake of the Barclays rate-fixing scandal. 
Sir Mervyn King, who refused to back Barclays chief executive Bob Diamond, added that the behaviour of Barclays’ traders underlined the need to separate high street banking from casino trading operations. 
“What I hope is that everyone now understands that something went very wrong with the UK banking industry and we now need to put it right,” he said. “From excessive levels of compensation, to shoddy treatment of customers, to deceitful manipulation of one of the most important interest rates. 
“We can see that we need a real change in the culture of the industry. And that will require two things, one is leadership of an unusually high order and [the other is] changes to the structure of the industry.”
Regular readers know that sunlight is the best disinfectant.

If you want to fundamentally change the culture of the industry, the only way to do that is by letting sunshine into all the opaque corners of finance.

Mervyn King and the BoE could start by requiring the banks to disclose all of their current asset, liability and off-balance sheet exposure details.

How could he do this?  By making this disclosure a requirement of any bank if it is to be eligible to access the Bank of England for liquidity support.

As a practical matter, there are no laws that prevent the banks from providing ultra transparency.  I am fully aware of the need to protect borrower privacy and providing ultra transparency is not inconsistent with protecting borrower privacy. 

Rather than leave it up to policymakers to take action that may not have any impact (it is far from clear that ring-fencing would have prevented the Libor scandal), it is time for Mr. King to take action to bring about the change in behavior he would like to see.

Banker bonuses win again: EU leaders agree to use rescue mechanism to bailout banks

As reported by Bloomberg and the Wall Street Journal, EU leaders have tentatively agreed to use funds from the European Financial Stability Fund and the European Stability Mechanism to purchase bank equity.

The clear immediate winners are the bankers.  Rather than having to write-down the loans and securities they made and bought to reflect the inability of the borrowers to repay, they will be able to pay themselves bonuses instead.

The clear immediate losers from the ongoing implementation of the Japanese model for handling a bank solvency led financial crisis are taxpayers.  Their money is going to be used to purchase equity in banks.  This has been tried repeatedly without success since the beginning of the financial crisis.

Buying equity in Spanish and Italian banks will not convince anyone that the banks or the sovereigns are solvent.

Rather, what buying equity in these banks allows is the purchase by these banks of more sovereign debt and the pledge of this debt to the ECB.  This is an important because it transfers more of the losses in the banking system onto the taxpayers who ultimately will have to pay for losses at the ECB, EFSF and ESM.

The way the transfer works is as follows:  Spanish and Italian banks use the combination of 'new' equity and ECB funds to purchase Spanish and Italian bonds from the non-Spanish and Italian banks at artificially high prices (remember:  Spanish and Italian banks are the only buyers of this junk in the market as everyone knows these countries have already issued too much debt).

This transfers losses that should have been realized by say German banks, think Deutsche Bank, to the Spanish and Italian banking system.  A transfer that clearly justifies the payment of bonuses by the selling banks as they have avoided realizing a loss.

Please note, while German banks escape the losses and its banker bonuses are protected, the same is not true for the German taxpayer.  The German taxpayer is still on the hook for the losses at the ECB that provided the money to the Spanish and Italian banks to buy their sovereign debt at inflated prices.

As your humble blogger keeps pointing out, bankers are great at offering recommendations for solving problems.  Unfortunately, any recommendation that comes from a banker is by definition good for the banker.  The question that must be answered is whether the recommendation is good for anyone else.

Thursday, June 28, 2012

Bob Diamond confesses: Barclays falsified Libor to protect bank during crisis

As reported by the Telegraph's Harry Wilson,

Barclays chief executive Bob Diamond has admitted for the first time that the bank made a conscious decision to falsify Libor rates in order to protect the bank at the height of the financial crisis. 
The revelation in a letter to the Treasury Select Committee will put increasing pressure on Mr Diamond to reveal whether the decision was taken at board level. 
“Even taking account of the abnormal market conditions at the height of the financial crisis, and that the motivation was to protect the bank, not to influence the ultimate rate, I accept that the decision to lower submissions was wrong,” he stated. 
In the most detailed account so far on how the Libor rates were manipulated, Mr Diamond said fixing of Libor rates was carried out by individual trades and, separately, by the bank itself. 
He said traders attempted to influence the rate in order to benefit their own desks’ trading positions. The bank made the decision in order to protect shareholders’ interests, he said..... 
In the letter Mr Diamond appeared to try and defend elements of the practice by pointing the finger at other banks. 
Addressing the market turbulence at the height of the financial crisis he wrote: “The unwarranted speculation regarding Barclays’ liquidity was as a result of its LIBOR submissions being high relative to those of other banks. At the time, Barclays opinion was that those other banks’ submissions were too low given market circumstances.” 
He also said individuals within the bank raised concerns about Libor rates with authorities including the FSA, Bank of England and US Federal Reserve.
The simple fact is that neither Barclays nor any other bank should ever be put in a position where they can and have an incentive to lie about their financial condition.  At the same time, no financial regulator should ever be put in a position where it might appear that they either encourage or condone a bank lying about its financial condition.

The only way to prevent either of these from occurring in the future is to require all banks to provide ultra transparency and disclose on an on-going basis their current asset, liability and off-balance sheet exposure details.

With ultra transparency, market participants have the facts and lying would be for no benefit.

After Libor Scandal, banks need to provide ultra transparency to restore trust

In his Telegraph column, Jeremy Warner observes

There is no industry in all commerce that relies as much on public trust and reputation for probity as banking. We have seen what happens when trust is lost: we get the legion of banking runs that lie at the heart of the financial crisis; people run for the hills and the economy grinds to a halt....
Entrusted with the public’s money, bankers have to be seen as whiter than white, pillars of their community and morally beyond reproach. All these old-fashioned virtues seem to have been lost in pursuit of the easy rewards of international finance. “My word is my bond” – once one of the sacred principles of City finance – has become reduced to a laughable parody of itself.....
We already know that at least 20 other banks are under investigation for alleged manipulation of interbank interest rates, including most of the other UK high street banks....  
That these practices appear to have been endemic, not just at Barclays, but across a wide range of international banks, neither excuses nor explains what happened.
Please re-read the highlighted text again as Mr. Warner cuts to the heart of the problem and why requiring banks to provide ultra transparency and disclose on an on-going basis their current asset, liability and off-balance sheet exposure details is the only solution.

Ultra transparency allows sunlight to shine in all the opaque corners of the banking system and acts as a disinfectant with regards to bad behavior.

Ultra transparency works because no longer are the banks protected from market discipline by the regulators, but instead the banks are subjected to true market discipline.

Regular readers recall that up until the 1930s, disclosing all of your exposure details was the sign of a bank that could be trusted as the bank way saying it could stand on its own two feet.

If we are going to restore trust, it is time we adopt this philosophy.

Facing 'policy of systemic dishonesty', Barclays tries sacrificial lamb defense

As reported by the Telegraph, in response to the Libor scandal and what appears to be a 'policy of systemic dishonesty', Barclays is blaming a few rogue individuals operating on their own behalf.

This response clearly misses the gravity of what has occurred.

What has occurred and Barclays has admitted to is that Barclays lied when it submitted interest rates to be used in calculating the Libor benchmark interest rates and Barclays intended to profit from these lies.

The most valuable commodity that a bank has to offer is trust.

Barclays has just admitted that it cannot be trusted.

While firing a few sacrificial lambs might save Bob Diamond's job for a few hours, at the end of the day, it does nothing to provide the market with a reason to trust Barclays.

Remember, Barclays needs the market to trust it, the market does not need Barclays.

Given that Barclays needs to earn back the market's trust, Barclays needs to take a step that will in fact signal to the market that it can be trusted now and going into the future.

The only step Barclays can take that does this is to voluntarily begin providing ultra transparency and disclosing on an on-going basis its asset, liability and off-balance sheet exposure details.

Any other step is just confirmation that Barclays is not to be trusted and is trying to preserve its 'policy of systemic dishonesty'.

The growing pressure on the bank and its board led to Mr Diamond writing an open letter to the Treasury Select Committee last night explaining the action the bank was now taking. 
"We are now completing a review of employee conduct for all those involved," the letter stated. "That process is rigorous and all appropriate options will be pursued for those who have a case to answer, ranging from the clawback or withholding of remuneration to being asked to leave the bank." 
Mr Diamond also said that the traders involved in the Libor scandal were "operating purely for their own benefit" and insisted that "inappropriate conduct was limited to a small number of people relative to the size of Barclays trading operations".....
Emergency talks have been held at the bank over how to deal with the crisis that has enveloped Barclays following its admission that it attempted to manipulate the Libor borrowing rate for several years. Investors last night were reported to be demanding a meeting with the bank's senior independent director, Sir Michael Rake. 
Martin Taylor, a former chief executive of the bank, described the findings against Barclays as showing a "policy of systematic dishonesty". 
"It's hard to believe that a policy which seems so systematic was not known to people at or near the top of the bank," added Mr Taylor.... 
However, pressure is growing for a criminal investigation of the bank's actions. George Osborne, in an emergency statement to Parliament, said the Serious Fraud Office was now considering taking further action. 
The move was backed by the Association of Corporate Treasurers, the representative body for the finance directors of many of Britain's largest companies, which said the authorities work was "unfinished".
It is precisely to win back the trust of these corporate treasurers that Barclays need to immediately take the step of voluntarily providing ultra transparency.

In his column, Damian Reece effectively calls for banks providing ultra transparency as he says that banks need to 'find a clear lasting solution to how they inculcate their organizations with the right priorities'.

The only way to do this is adopt ultra transparency.  The sunlight brought in by ultra transparency acts as a disinfectant on the wrong priorities.

Banks are becoming tinged with same anti-social status that cigarette makers rapidly acquired as links between smoking and cancer (and their alleged cover up) came to the fore. 
The banks risk large, industry-wide lawsuits, which will have to be dealt with. 
But they need to renew their permission to trade too with the customers they were meant to be serving. It's a question of legitimacy. To restore the trust necessary to win that back, banks will have to change their behaviour.
Tobacco companies have had new behaviour forced upon them – a ban on advertising and smoking in public places for instance. 
Banks risk this in the form of yet more red tape, which would be counterproductive to the economy as a whole. But they are now isolated and have few if any advocates – beyond this newspaper. 
The reason this column still defends banks, yes even now, is because banking, unlike smoking, fulfils a social use and is central to wider wealth creation. But banks have forgotten their very real responsibilities to society (customers) in favour of owing responsibilities first to themselves and second to shareholders. 
Banks' response to this latest scandal should be to find a clear and lasting solution to how they inculcate their organisations with the right priorities. That would be of more use than swapping one banker for another in the boardroom – and certainly of greater urgency for the good of banking and the wider economy.

Germany, bailouts and ultra transparency

As the EU heads to its latest summit, Germany is under tremendous pressure to fund a bailout of EU sovereigns and banks.

Germany's response is nein (no, to those of us whose speak English).

The reason is that they don't think it is appropriate to give their credit card to someone and then not have control over their spending.

If this sounds familiar, it should.  This reason was offered up by critics of the bank bailouts at the beginning of the financial crisis.

By putting taxpayer money into the banks, we gave bank management the ability to freely spend the taxpayers' money.

How did bankers respond?  They paid themselves big bonuses and went back to the casino.

Here's hoping that Germany stands firm and instead tells the other EU countries to adopt the Swedish model with ultra transparency.

Under the Swedish model, the banks recognize all the losses on the excesses in the financial system today.  Subsequently, they rebuild their book capital through retention of 100% of pre-banker bonus earnings.

With ultra transparency, market participants have the information they need to confirm that all the losses are taken and to exert discipline so that bankers don't gamble while they are rebuilding their balance sheets.

Ecclesiastical fund manager: 'UK banks are the last place an investor should be'

The Telegraph interviewed Ecclesiastical fund manager Robin Hepworth.  Ecclesiastical was formed 125 years ago to address the church's financial needs.  His observation about UK banks is presented without further comment:
“We have had very little exposure to UK banks for around five years, and we maintain that call. UK banks are poorly funded and undercapitalised,” he said. “UK banks are the last place an investor should be.” 

Barclays rate rigging shows 'corruption at the heart of our banking system'

A Telegraph article focuses on the real issue with the Libor interest rate scandal:  five years after the financial crisis began we have still not implemented common sense reforms like requiring valuation transparency in all the opaque corners of the financial system.

Requiring valuation transparency should be a no brainer given that our financial markets are based on the philosophy of disclosure.  Specifically, it is the government's job to ensure that all market participants have access to all the useful, relevant information in an appropriate, timely manner to make a fully informed investment decision.

Useful, relevant information is not restricted to the last price a security traded at.  As intended by the FDR administration, it is the information needed to independently assess the value of a security in the absence of price.

The FDR administration recognized that the investment process goes as follows:  independently assess the value of the security, look at price shown by Wall Street, and then and only then make a portfolio management decision to buy, hold or sell.

Regular readers know that it was the opaque areas of the financial system that bankers exploited and that failed when the financial crisis began.  Opaque areas included both banks and structured finance securities.  The former saw the interbank lending market freeze and the latter saw a collapse in both primary issuance and in use as security for repurchase agreements.

The Libor interest rate is another example of an opaque area of the financial system that was exploited by bankers for their benefit.

Mr Vicary-Smith [chief executive of Which?] said that four years on from the financial crisis there is “no evidence that the worst culture and practices in banking have changed at all”. 
He said: “Once again another scandal highlights the corruption at the heart of our banking system, with no individuals held to account and senior bankers behaving as if they are above the law.....
Mr Vicary-Smith accused the British Bankers Association (BBA), which represents the banking industry, of being silent on the matter.
“The BBA, which is so visible when it campaigns against banking reform yet today is silent, must not escape scrutiny for its role in managing the Libor scheme. It is surely time for this crucial function to be handed to an accountable authority capable of ensuring the information provided by banks is robust,” he said.
It is already the government's role to ensure the information provided by banks is robust.

The question is why wasn't the information robust?
Meanwhile Brendan Barber, the general secretary of the TUC, said that regulatory failure is behind the crisis. 
“Barclay’s rigging of interest rates, which other banks may well have colluded with, shows how light-touch regulation in the City has allowed dodgy practices and reckless behaviour to flourish unchecked. 
A potential answer is that the regulators did not do their job.
“Directors’ attempts to palm the crisis off with a few lost bonuses is insulting to taxpayers who have paid so heavily for bankers’ incompetence. This scandal needs a tougher response from the bank and the government to stop further abuses from taking place,” said Mr Barber.
The much tougher response would be to enforce those draconian disclosure requirements that are at the heart of our financial system and are a necessary for the financial system to function properly.

British Bankers' Association asks government to regulate Libor

The Financial Times is reporting this morning that the British Bankers' Association is asking the UK government to step in to regulate and supervise how Libor is set.

Regular readers know that the only way to restore confidence in Libor is by basing it off of actual trades that are disclosed to all market participants.

As a result, the BBA is asking the UK government to require that banks provide transparency and disclose all of their asset, liability and off-balance sheet exposure details.

It is only with this data that market participants can cross-check one bank's assets with another bank's liabilities.

It is only with this data that market participants can decide which trades to include in setting Libor.
The British Bankers’ Association has asked the UK government to consider regulating and supervising the setting of the London interbank rate offered rate at the heart of Barclays’ £290m penalty for rates manipulation. 
Under a historical quirk, the process of setting Libor has always been considered a private activity run by the banking trade body, although the banks who participate in the rate-setting process are regulated by the Financial Services Authority. 
Barclays admitted Wednesday that its submissions to the Libor process were improperly affected by requests from traders to move the rate to the benefit of their derivative positions, as well as by a desire to make the bank look stronger during the financial crisis.....
The goal of disclosure is to provide market participants with an accurate picture of what is happening.  Barclays' desire to paint a false picture of greater strength confirms the need for ultra transparency.
The BBA is currently reviewing the way Libor, which is the basis for $350tn in contracts world wide, is set amid probes that have swept in nearly 20 banks and a dozen regulators on three continents. 
In a statement on Thursday, the trade body said: “The British Bankers’ Association is shocked by yesterday’s report about Libor.
Shocked in the same way as discovering that there is gambling going on?
“The current Libor review, with which our authorities are fully engaged, has been under way since March this year and is considering all aspects including the setting process. As part of this review we will now be asking the authorities to consider in what manner the Libor setting mechanism should be regulated in the future.”
The Lex column of the Financial Times supports your humble bloggers call for using actual data.
But it is also important that the industry and the regulators now rethink the way in which Libor is calculated. 
Whenever possible, benchmark rates should be based on actual interbank lending rates, which are more difficult to manipulate.
So that market participants can confirm the actual interbank lending rates and eliminate manipulation requires banks provide ultra transparency.
Estimates should only be used when hard data are not available and these should be routinely cross-checked against other data on bank-risk, with corroboration sought from other banks, so as to identify who is cheating. 
From personal loans to mortgages, Libor affects the entire credit market. A benchmark that cannot be trusted has no point.
Please re-read the highlighted text and remember that in the financial markets trust is a direct result of disclosure!

Update II
Regular readers know that your humble blogger has been writing on and talking about opacity and the harm opacity causes the financial markets since before the financial crisis.  I have always done this talking about the solution:  transparency.

They also know that your humble blogger has focused on structured finance and banks as examples of opaque areas of the financial system that need the sunlight provided by transparency to disinfect them.

Finally, they know that Libor is just another example of opacity and the harm it does to financial markets.

That said, I want to offer a special recognition to ZeroHedge for identifying and calling attention to the Libor scandal.  ZeroHedge has done a terrific job in discussing the who, what and why of the Libor scandal and calling attention to it in the first place.

If your humble blogger has added any value to the discussion, I hope it is in talking about how transparency can be used as the basis for a 'new' Libor that can be trusted and not manipulated by the banks.

'Manipulating Libor is manipulating the price of money itself'

In his Telegraph column, Damian Reece explains the true implications of Barclays admitting that it manipulated the Libor benchmark interest rate means:

Libor – the London Inter Bank Offered Rate – is the primary market rate of interest. The Bank of England sets the official policy rate but Libor is the actual cost to a bank of borrowing unsecured funds from one another overnight. Without that flow of funds the financial system doesn't work. 
Please note that the interbank unsecured lending market froze at the beginning of the financial crisis.  It froze because in the absence of ultra transparency no bank could determine which banks were solvent and which banks were not and as a result they were unwilling to lend.

One of the reasons for requiring banks provide ultra transparency and disclose all of their exposure details is to prevent the interbank unsecured lending market from freezing in the future and keeping the financial system working.
That's why interest rates on subsequent loans of any shape or size are set at a margin above Libor. It's where the market pricing of money, or credit, begins. 
And given these loans become tradeable assets in themselves, with a multitude of derivative contracts – or financial bets – attached to them, Libor is used to price these markets too. It's the rate of interest charged at the very base of the financial pyramid. 
US regulators on Wednesday gave a useful sketch of what that global pyramid looks like and why Libor is so important. At the apex it reckons there are loans worth $10 trillion (£6.4 trillion) priced off Libor. There are then interest rate swaps (derivatives which are insurance against adverse interest rate movements) worth $350 trillion, also priced with reference to Libor, and then at the base of this tower eurodollar futures (short-term loans which are also bets on interest rate movements) worth $564 trillion.
Based on the US regulators pyramid, the value of any change in Libor is calculated by multiplying the change in Libor by $900 trillion by the number of days the change occurs over divided by 360.

If Libor moves up or down by 1/100 of 1%, otherwise known as 1 basis point, we are talking $90 billion on an annualize basis.

This is a really big number.

Said another way, look at the size of the incentive to move Libor by say 3 basis points.  We are talking over $250 billion or a quarter of a trillion annually!  Even by government standards, we are talking about real money.
Given this, it's surprising that setting the rate for Libor is unregulated. But it's not even subject to the full forces of the free market either. It emerges from a 16-strong cartel of banks which, as we now know, was ripe for abuse. 
Regular readers are not surprised that Libor is unregulated.  They know that it is another example of the regulators allowing the banks to bring opacity into the financial system.

Had the regulators required banks to provide ultra transparency, Libor would not have been ripe for manipulation.  Instead it would have been based off of actual trades from the beginning.
By manipulating Libor, up or down, Barclays could variously make profits on its own interest rate punts or give a dishonest impression to the market of its own cost of funding. It was, according to its own staff, "being dishonest by definition". 
It can't get much worse. Except it can, because Barclays is just the first bank to settle. 
There's a string of Libor-related cases about to break, that will drag a number of household names into a scandal. The fines meted out to Barclays totalling £290m ($452m) will surely top $1bn before regulators are through.

Since the cost of manipulating the benchmark interest rate is a small fine which pales in comparison to the value of manipulating Libor, it would be surprising that banks did not manipulate the rate from Day 1.  The regulators were able to track manipulation back to at least 2005.

This fine is a trivial cost of doing business.

At this point, there is only one way to restore confidence in the global financial system.  That is to recognize that sunshine is the best disinfectant and shine it onto all of the opaque corners of the financial system.

Your humble blogger would recommend that we start with the banks and structured finance securities.

Given the Libor Scandal there is no excuse for the global financial regulators not to require banks to provide ultra transparency or require structured finance securities to provide observable event based reporting effective immediately.

Every day the global financial regulators fail to do so will be another day that erodes investor confidence in the markets.

Wednesday, June 27, 2012

Call by Bank of England to Barclays about Libor makes case for requiring banks to provide ultra transparency

According to a Bloomberg report, during the height of the financial crisis the Bank of England made a call to Barclays that may have triggered the submission of false data for setting Libor.

Regular readers know that the only way investors will ever trust the financial markets is if there is the disinfectant of sunlight being shone on all the opaque corners of the financial system.  This includes bringing ultra transparency to banks by requiring them to provide on an ongoing basis disclosure of their current asset, liability and off-balance sheet exposure details.

With this information, Libor could be based on actual trades as opposed to make believe.

With this information, inquiries by regulators don't trigger interest rate manipulation.

With this information, the question of did the regulator request Barclays lie to lower Libor does not get raised (remember, unless the call was recorded (was it and if not why not?), there is plausible deniability about what was said and the action taken).

Without this information, there is the perception that the Bank of England might have had a very good reason for wanting Barclays to lie about Libor as it would make the banks appear to be stronger than they were.

As a practical matter, the interbank lending market had frozen as no one could tell who was solvent and who was not and as a result who was likely to repay any funds and who was not.  As a result, Libor was complete make believe.

Barclays Plc (BARC) deliberately reported artificially low borrowing costs at the height of the 2008 financial market turmoil after a senior manager discussed external perceptions about the bank’s strength with regulators at the Bank of England
Barclays, which was fined $453.2 million by U.S. and U.K. regulators for submitting false London and euro interbank offered rates, “believed mistakenly that they were operating under an instruction from the Bank of England” to lower its Libor submissions, Britain’s Financial Services Authority said today. 
The case is the first in an international investigation into whether banks tried to manipulate Libor, the benchmark rate for $360 trillion of securities, to hide their true cost of borrowing as financial markets were roiled by the September 2008 collapse of Lehman Brothers Holdings Inc.
At that time, Barclays was concerned about how it was being perceived due to its higher Libor submissions relative to other banks whose reported borrowing costs helped establish the benchmark rate, the U.S. Commodity Futures Trading Commission said in its order today. 
“Even though it maintained that its liquidity position was in fact strong, Barclays was increasingly worried about these market and media perceptions,” the CFTC order said. 
In October 2008, the Bank of England had a telephone conversation with a senior individual at Barclays in which it raised questions about the bank’s liquidity position and relatively high Libor submissions, the CFTC said. 
In reaction to the external pressure and the discussion with the Bank of England, Barclays believed it needed to lower its Libor submissions, the CFTC said.

According to the U.K.’s FSA, the Bank of England did not instruct Barclays to lower its Libor submissions during the phone call. 
Instead, a “misunderstanding or miscommunication” occurred within Barclays as the substance of the conversation was relayed down the chain of command, the FSA said. 
A Bank of England spokesman said the call was one of many regular market calls made by the bank and was conducted by Paul Tucker, who was markets director at the time and is now the central bank’s deputy governor for financial stability. 
A member of Barclays’ senior management later instructed the employees to lower the Libor submissions for dollars and sterling so Barclays would be “within the pack,” or in line with rates reported by the other banks, according to the order. The employees, whose identities were withheld by investigators, reluctantly complied with the request, the CFTC said.

“I will reluctantly, gradually and artificially get my libors in line with the rest of the contributors as requested,” the Barclays employee responsible for submitting dollar borrowing costs said in an e-mail cited in the CFTC order. “I will be contributing rates which are nowhere near the clearing rates for unsecured cash and therefore will not be posting honest prices.”

As a result of the Libor scandal, will Barclay's recognize only providing ultra transparency will restore its credibility?

In his Wall Street Journal Heard on the Street column, Simon Nixon observed
Barclays can live with the fine, but damage to the bank's reputation and that of its top management, none of whom has resigned, could be lasting. 
Barclays says many of those directly responsible now have left the bank. Some employees may yet face disciplinary and even criminal proceedings, according to people briefed on the situation. 
The bank says top managers were unaware of the abuses, cooperated fully with the investigation, settled quickly and have introduced new processes to prevent this from happening again.....
But this isn't good enough. The regulatory documents show that, at best, Mr. Diamond and his team presided over a culture of sloppiness, greed and a lack of concern for clients' interests. At worst, employees' behavior flirted with criminality. 
For all Mr. Diamond's recent homilies about "citizenship," investors will wonder whether an unchanged top team is really best-placed to restore the confidence of clients and regulators....
Certainly, [the Libor scandal] threatens to further undermine public confidence in the investment-banking industry at a time when its business model and ingrained conflicts of interest are under unprecedented scrutiny. 
The scandal also threatens to do further damage to the reputation of London as a financial center. The Barclays settlement comes just days after a U.S. senator publicly noted how many boom-time scandals originated in London. 
All the more reason why Barclays should show real citizenship by taking the sort of action that might signal the world it truly understands the gravity of this scandal.
Regular readers know that there is only one way for Barclays to restore its credibility after it confessed to manipulating one of the key market interest rates to the detriment of investors and borrowers.

Restoring credibility and trust can only be achieved by voluntarily providing ultra transparency and disclosing on an on-going basis its current asset, liability and off-balance sheet exposure details.

It is only with this data that market participants can confirm that Barclays is not trying to manipulate Libor again.

It is only with this data that Barclays can show that it is a good citizen and is focused on supporting the real economy and not operating a casino.

It is only by providing this data that Barclays can hope to restore the confidence of clients, regulators and investors.  

The failure to provide this data is an announcement that Barclays has something to hide and should not be trusted.

I look forward to talking with Mr. Diamond shortly and working with Barclays as it steps up to show real citizenship and leadership in the City by providing ultra transparency.

With Barclay's admission of manipulating Libor, banks face billions in claims

No sooner had your humble blogger pointed out the first rule of large numbers, but the Telegraph now reports that banks are facing billions in claims as a result of manipulating Libor.

Regular readers know that manipulating Libor is just one example of what the banks did in every opaque corner of the financial system.  The only way to end these practices is to shine the bright light of transparency and disinfect the financial system.

Damages claims running to billions of dollars against the world’s biggest banks have been given fresh “credibility” by Barclays £290m Libor settlement, lawyers said. 
The British bank is already named as a defendant in various class actions around the world, where investors are seeking compensation for buying financial instruments based on a Libor benchmark that was allegedly manipulated. 
One of the biggest class-action claims has been filed in New York by the Mayor and City Council of Baltimore and the City of New Britain Firefighters and Police Benefit Fund.
Barclays is named as one of around 20 defendants, which also include Royal Bank of Scotland and HSBC, as well as US lenders Bank of America, Citigroup and JP Morgan. 
The action is co-ordinated with five other lawsuits, including a claim by discount brokerage Charles Schwab against 11 banks, including Barclays. 
The sums involved are potentially vast. Libor is used to price various financial products. The Bank for International Settlements calculates that the market for over-the-counter interest rate derivatives, such as swaps, had a notional value of more than $500 trillion in 2011. Just a small element of proven mispricing could trigger billions of dollars of claims.

Libor manipulation could have cost borrowers billions

The first rule of very large numbers is:  multiplying a very large number by a small number results in a large number.

When it comes to manipulation of the Libor interest rate, we are talking about small number.  When we are talking about the value of the financial instruments that reprice off of Libor we are talking about a very large number.

By applying the first rule of very large numbers, we know that the result of the manipulation will be a large number.

According to a Telegraph article,

The British and US authorities said they had found evidence Barclays had attempted to manipulate a key borrowing rate for years, meaning that home owners could have paid millions more in mortgage payments than they might otherwise have had to. 
Traders at the bank were discovered to have engaged in regular attempts to determine the London Interbank Offered Rate (Libor) from as early as 2005. 
The manipulation of Libor saw the bank make submissions to the setters of the rate that they knew to be wrong as they attempted to influence the level at which it was fixed. 
Barclays also attempted to suppress Libor, which means that savers could have potentially lost out on millions in interest due to the rate being lower than it should otherwise have been.
Please re-read the highlighted text as by itself it shows why the only way to restore confidence in Libor going forward is to base it off of actual trades.

Trades that are disclosed as part of each bank providing ultra transparency and disclosing on an on-going basis their current asset, liability and off-balance sheet exposure details.

By requiring the banks to disclose all of their liability details, banks are prevented from manipulating Libor by cherry-picking one or two trades.

By requiring the banks to disclose all of their liability details, market participants can do a better job of assessing the true cost of funds to the banks.  For example, they might take the average cost of funds for all trades or they might take the average cost of funds for trades after excluding the most expensive and least expensive trades.

Breaking up big banks hard as regulators protect them from market forces

Bloomberg ran a long article on how breaking up the Too Big to Fail banks is hard as regulators protect the banks from market forces.

Regular readers are familiar with how the financial regulators' information monopoly shields the banks from market discipline related to investors adjusting the price and amount of their exposures based on the riskiness of the bank.  This article extends the financial regulators protection into different forms of market discipline.

Politicians and regulators have resisted calls from some investors to split up conglomerates that were assembled over two decades by executives such as former Citigroup Chief Executive Officer Sanford “Sandy” Weill and former Bank of America CEO Ken Lewis. 
These universal banks offered customers everything from checking accounts and insurance to derivatives trading and merger advice....
There’s little sign that market forces are changing the universal-banking strategy. 
Corporate raiders or potential takeovers don’t provide the same impetus for banks as they do in other industries. Laws prohibit non-financial firms from buying lenders, and banks can’t make purchases that give them more than 10 percent of U.S. deposits.... 
Legal obstacles create barriers to market discipline through change in control of the bank.
After the crisis, policy makers, politicians and former bankers began calling for a breakup of too-big-to-fail banks. They’ve included former Citigroup co-CEO John Reed, U.S. Senator Sherrod Brown, an Ohio Democrat, former Federal Reserve Bank of Kansas City PresidentThomas Hoenig and Dallas Fed President Richard Fisher.... 
That wasn’t the course taken by Greenspan’s successor, Ben S. Bernanke, and Timothy F. Geithner, who led the New York Fed before President Barack Obama appointed him Treasury secretary. 
They supported legislation that allowed the banking conglomerates to remain intact and sought to address the risks of future collapse by requiring them to hold more capital, submit to new regulations and prepare living wills to help the government dismantle them in the case of a calamity.
To Ira M. Millstein, a senior partner at New York law firm Weil Gotshal & Manges LLP ..... “we’re simply allowing regulators who missed the boat the first time to try again with even more regulation.”
Regulators create a barrier as they want to show they are up to the task of supervising large firms.  Regulators have an ego too.
Fisher, who said he has been underweight bank stocks compared with benchmark indexes for three years, sees another explanation for why banks stick to their model. 
“The inherent nature of a lot of CEOs is to love empire building,” Fisher said. “The ones that love empire-building will do whatever he or she can to dissuade the board of directors” from breaking their companies up.
High compensation for bank CEOs and their boards of directors is another reason they’re resistant to change, according to David Ellison, president of FBR Fund Advisors Inc. in Arlington, Virginia, and chief investment officer of FBR Equity Funds....
High compensation and empire building go together.  The bigger the empire, the more both management and the directors can be paid.
Managements and boards also are protected from market forces in ways they wouldn’t be at industrial conglomerates, said Amar Bhide, a professor at the Fletcher School of Law at Tufts University. Regulators won’t permit leveraged buyouts of banks, and the largest U.S. lenders are too large to be candidates for LBOs, he said. 
“Unless somebody comes in and says, ‘Aha, this bank is trading so far below book value that I can come in and break it up and sell the pieces,’ what’s the incentive for the boards of directors?” Bhide said. “Banking is an industry where these things are simply not allowed.’”
One of the reasons that banks trade so far below book value is that book value is overstated as a result of regulatory forbearance.  It is not at all clear that without ultra transparency under which banks disclose all of their exposure details that anyone would be willing to step up and buy a bank when you cannot tell if it is solvent or not.

Barclay's admission of manipulating Libor confirms ultra transparency needed so Libor can be based on actual trades

Bloomberg reported that Barclay's has admitted it manipulated Libor during the financial crisis, has paid a $453 million fine and has stripped the bonuses from CEO Bob Diamond and three other bankers.

The only way to prevent this ever occurring again is to base Libor off of actual trades and not on easy to manipulate estimates.

The best way to base Libor off of actual trades is to require the banks to provide ultra transparency and disclose on an on-going basis their current asset, liability and off-balance sheet exposure details.

Market participants can use the information from the liability details to calculate Libor.

With all of the liability details, as opposed to a single trade, market participants are in a better position to establish what are the real funding costs a bank faces.  This results in a more trustworthy interest rate.

Barclays Plc (BARC) was fined 290 million pounds ($453.2 million), the largest penalties ever imposed by regulators in the U.S. and U.K., after admitting it submitted false London and euro interbank offered rates. 
Chief Executive Officer Robert Diamond and three lieutenants will forgo their bonuses as a result, Britain’s second-biggest bank by assets said in a statement today. 
Derivatives traders requested the false submissions in the Libor and Euribor setting process, as they were “motivated by profit and sought to benefit Barclays’ trading positions,” Britain’s Financial Services Authority said....
Barclays tried to influence other banks’ Euribor submissions and reduced their Libor submissions during the financial crisis “as a result of senior management’s concerns over negative media comment,” the FSA said. The breaches included “a significant number of employees and occurred over a number of years,” the regulator said....
Please re-read the highlighted text as it is an example of how Wall Street tries to benefit from opacity.  It is also an example of why ultra transparency is needed.
“Libor and Euribor are critically important benchmark interest rates,” said Lanny A. Breuer, assistant attorney general of the Justice Department’s Criminal Division. “Because mortgages, student loans, financial derivatives, and other financial products rely on Libor and Euribor as reference rates, the manipulation of submissions used to calculate those rates can have significant negative effects on consumers and financial markets worldwide.”
A negative impact on consumers and financial markets, but a positive impact on banker bonuses!
Barclays traders in New York, London and Tokyo attempted to manipulate rates to benefit their trading positions in swaps and futures that were tied to the rates, according to the CFTC. 
Traders at Barclays made the requests regularly and sometimes daily from mid-2005 through 2007 and sometimes later until 2009, the agency said in a statement.
How much money did Barclays make as a result of manipulating Libor?
“Banks that contribute information to those benchmarks must do so honestly,” David Meister, the CFTC’s director of enforcement, said in a statement. “When a bank acts in its own self-interest by attempting to manipulate these rates for profit, or by submitting false reports that result from senior management orders to lower submissions to guard the bank’s reputation, the integrity of benchmark interest rates is undermined.”
The only way to enforce honesty and maintain the integrity of Libor is by requiring ultra transparency.
Senior Barclays managers told staff to submit artificially low rates to Libor from August 2007 until early 2009 to boost the bank’s financial condition, according to the CFTC....
I wonder what a banker has to do to get suspended from working for a financial institution if trying to manipulate Libor results in a slap on the wrist from regulators?
Traders at Barclays also coordinated and abetted with traders at other banks to manipulate Euribor, including affecting rates on specific dates when derivatives contracts are settled or reset, according to the CFTC.... 
Libor is derived from a survey of banks conducted each day on behalf of the British Bankers’ Association in London. Lenders are asked how much it would cost them to borrow from each other for 15 different periods, from overnight to one year, in currencies including dollars, euros, yen and Swiss francs. After a set number of quotes are excluded, those remaining are averaged and published for each currency by the BBA before noon. 
Employees responsible for Libor submissions have said in interviews with Bloomberg News they regularly discussed where to set the measure with traders sitting near them, interdealer brokers and counterparts at rival banks. The talks became common practice after money markets froze in 2007, they said, making it difficult for individual bankers to gauge the cost of borrowing from other lenders.
Regulators are focusing on the lack of so-called Chinese walls between traders and employees making interest-rate submissions on behalf of their banks, and whether the banks’ proprietary trading desks exploited the information they had about the direction of Libor to trade interest-rate derivatives.
As I said, it is time for ultra transparency and cleaning up all the opaque corners of the financial system.