Global banks shamed over rate-rigging scandal

Britain’s Royal Bank of Scotland has become the third bank to be slapped with a huge fine for a multi-million pound rate-rigging scandal. What has gone wrong with the banks?

The reputation of banking has rarely been worse. Economic crises, extravagant bonuses and huge government bailouts have made it the industry everyone loves to hate.

Of all banking’s recent scandals, one of the most outrageous involved Libor. For years, city traders illegally fiddled this crucial borrowing rate, in pursuit of enormous profits for themselves.

The Libor scandal infected the world’s biggest banks, in several countries. Rivals businesses conspired together to break the law for personal gain. The fixes influenced the value of transactions worth trillions of pounds, including the investments and mortgages of ordinary people.

This week, the Royal Bank of Scotland was made to answer to its role in wrongdoing. Yesterday, American and British authorities slapped a fine of £390 million on the British bank, making it the third UK institution so far to be punished for Libor fixing. Banks in Germany and Japan have also been implicated.

Evidence for the offences makes jaw-dropping reading. At RBS, individual bankers exchanged jokey instant messages offering sushi and steak to colleagues who broke the law. ‘It’s just amazing how Libor fixing can make you that much money,’ one trader gushed. ‘It’s like a cartel now in London.’

Was the corruption widespread? At RBS at least, it seems illegality did not go to the top. Of the eleven million documents examined by officials, just 219 contained Libor requests; out of thousands of RBS employees, just 21 were directly implicated. All have left their jobs or await punishment: criminal charges have not been ruled out.

Much of the fine will be taken from bonuses of employees who were not involved in the scandal. One senior manager, too, has been shown the door.

Yet despite shouldering some of the blame, bank chiefs are keen to argue that the fiasco was the work of a minority. ‘Pockets of individuals’ appeared to have ‘lost touch with basic principles of right and wrong’, the bank’s chairman said. The Financial Services Authority,the City regulator agrees: a few bankers decided ‘the rules did not apply to them’, it said

Don’t bank on it

Some economists argue that it is tempting in business of any sort to make more money by running a cartel: Adam Smith famously wrote that 'people of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.'

But what about personal responsibility, others will say: every one of the bankers involved in rate-rigging had a choice and could have refused to get involved.

And however hard we try to enforce the rules, there will always be some who think they can manipulate the game. Rogues like these are a problem – maybe we should not judge the whole industry by their standards. But maybe we should also expect more of individuals if they find the people with whom they work are breaking the law?

You Decide

  1. Do you think the Libor scandal is the fault of a few individuals, or the banking culture itself?
  2. Are adults as vulnerable to peer pressure as young people?

Activities

  1. Write a story about a young financial worker, who is given the opportunity to make large amounts of money by breaking a rule. How does she react?
  2. Research cartels: how they operate and whether attempts to ban or break them up can be successful.

Some People Say...

“Don’t hate the player, hate the game.”

What do you think?

Q & A

So will this affect me?
The Libor rate-fixing scandal may have affected different people in different ways. Most of the rates in personal accounts wouldn’t have been affected by the rate. But larger organisations and mortgage holders may have received a lower rate of interest due to artificially depressed Libor rates. Now, some might ask for their money back.
I don’t have savings though.
Even if your savings are not affected by the Libor rate, you might want to pay attention to RBS: the bank was bailed out following the financial crisis, and the UK government now has majority ownership of it. Eventually, the state will be able to sell RBS. The more it is eventually worth, the more money will be returned to public services like healthcare or education.

Word Watch

American and British authorities
RBS is set to pay £87.5m to Britain's Financial Services Authority, along with $150m (£97m) to the United States Department of Justice and about $325m (£208m) to the US Commodity Futures Trading Commission(CFTC).
Third institution so far
Barclays was fined £290 million for its role in the scandal; UBS £940 million.
Masters of the universe
People working in financial services are sometimes referred to as ‘masters of the universe’, especially when they are not especially popular. The phrase is meant to communicate the way the wealth and power of the banking industry isolates people from the normal world, and is taken, in part, from Tom Wolfe’s 1987 novel Bonfire of the Vanities.
One senior manager
Many believe that John Hourican, Head of Investment at RBS, did not deserve to be shown the door. But an impression that RBS had been too slow to crack down on illegal practices meant someone in senior management had to take responsibility. On leaving, Hourican maintained that the ‘unauthorised activities’ were nothing to do with him, but accepted he should leave: ‘the jobs that many of us do are well paid and with high reward comes a greater responsibility.’
Financial Services Authority
The FSA is responsible for regulating the financial services in the UK. Its board is appointed by the treasury but it operates separately from the government.

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