The Staggers

The New Statesman’s rolling politics blog

Don't blame Barclays alone

This is not a Barclays scandal, it's a banking scandal.

By Richard Murphy Published 28 June 2012 15:50

Barclays chief executive Bob Diamond. Photograph: Getty Images.

Barclays chief executive Bob Diamond has resisted calls for his resignation. Photograph: Getty Images.

It’s always been easy to be angry with Barclays Bank. My campaigning goes back to the 1970s when Barclays were a target for the anti-apartheid movement (and rightly so). The past day has provided yet more ammunition for those who would like to single out this bank for attention, and I admit that I have been one of them since that has been what the media has demanded. And yet, we need to stand back and be calm (to misquote the famous poster).

Of course Barclays has admitted to a serious allegation. They helped rig markets. It is likely that ordinary people paid the cost of that manipulation. It is impossible that senior management did not know about this, but it is likely that they will walk away largely unscathed from the whole debacle, their bonuses apart.

It is however important to put this in context. Barclays was not alone in rigging this market. Indeed, they could not have done it alone. This failure was not, therefore, a failure of a particular bank. It was a failure of the banking system.

It is also very clear now that regulators knew about this failure by 2006, at least, and yet it has taken until 2012 for the first penalty to be imposed. There has, therefore, been a failure of the regulatory system as well, and a systemic one at that. The question is not therefore whether Bob Diamond should go (he should, very obviously) or whether Barclays and other should be prosecuted (as seems possible to me under section 4 of the Fraud Act 2006); the real question should be what causes systemic failure, and what can we do about it. The answer to that question is to first of all change regulation and secondly to change the nature of banking. In both cases the reason for change is a simple one, which is that the existing models of both banking and regulation are based on false hypotheses.

As Lord Turner reported in his 2009 report on the financial crash, regulation at the Financial Services Authority was based on the assumption that the efficient market hypothesis held true (page 39, here) He realised then that this was not true. Perhaps most importantly, two assumptions the FSA made, which were that market prices are good indicators of rationally evaluated economic value and that market discipline can be used as an effective tool in constraining harmful risk taking can now be seen to be not just wrong, but that they were fundamentally flouted by banks rigging prices and manipulating markets to mitigate their risk at cost to others.

No wonder we had a crash: regulation assumed a bunch of innocent price taking banks all subservient to the market when nothing could have been further from the truth. It’s an unfortunate fact that regulation will have to be rebuilt on the basis that markets can’t be trusted and regulatory intervention will have to be the norm, not the exception. The era of "light touch regulation" has to be over.

That has implications for the structure of banking too. The assumption that they can be trusted is also implicit in the Vickers recommendations. Their suggestion that banks can be split under common ownership is dependent upon the belief that Chinese walls will be respected. It’s now clear that banks do not respect rules. More than that, manipulation between departments who were not meant to talk to each other was clearly commonplace at Barclays, and presumably elsewhere. On that basis Vickers has now to be consigned to history: the only way forward is to break banks up with high street and investment banking operations separated, for good.

So far we’ve wasted four years since the crash doing nothing to address the problems in our banking system. If this latest Barclays debacle does anything it suggests that the time for prevarication is over.

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Tags: Barclays

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25 comments

Thu, 2012-07-19 13:50 — Goji (not verified)

Nice article..... interesting.
Goji Goji fructe goji

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Sun, 2012-07-01 06:44 — ulil amri (not verified)

nice news . . .

thanks for article

Sun, 2012-07-01 06:41 — medanshare (not verified)

Don't blame Barclays alone

MedanShare

Sun, 2012-07-01 02:38 — dfhdkjm

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Sat, 2012-06-30 16:15 — Mr Humanus Wright (not verified)

Quote of the Day - Regarding Gareth Williams, “The world was ours for the taking.”. There's a rumour going around that Gareth may of had some sort of a last covert mission with 'Dolly the Sheep', prior to his demise, but it hasn't been fully substantiated! Apparently Alex Chapman didn't know about this covert relationship, but he may have Saw(ers) alot! Ronan Summers definitely didn't have anything to do with it, even though he loves to drink Tenets! We all love Wiltshire (Porton Down) more than Gloucestershire (GCHQ), even more so then Worcestershire (RSRE). Military Radiations Signals Intelligence always use to do 'his head in', especially when using ELF or VLF frequencies, impacting directly on the 'Neural Oscillations' of the Central Nervous System. But taking a 'Nano-Medicine' Paracetamol takes the head to a new level of game play, I'll assure you of that! Nothing to do with BCI, RNM, Synthetic Telepathy ... that would REALLY BE MAD!!! An odd thought shared ... the illegal "watching over" in our individual 'castles' of this beloved Britannia, while entertaining Babar Pappa.

Sat, 2012-06-30 15:03 — Eddy S (not verified)

the problem really boils down to this. this country needs the banks more than the banks need the country.

Banks pay billions in taxes and also employ hundreds of thousands in London, yes hundreds of thousands. The problem really is this - the city is doing as well as it did (when it was generating billions for the treasury in the hey days of the noughties). What we put in RBS is peanuts compared to what the country get's out of the banks.

Rather than put the money aside we assumed the good times would last forever and that money was spent on government spending primarily on wages and benefits rather than strategically targeted investments in other industries so that we could diversify the economy.

What we need to do is DIVERSIFY the economy in other areas but not the state as we can't sell state goods and services abroad. WHERE IS OUR NEXT EXPORT SECTOR.

Expect feeble answers from politicans to these challenges,

Sat, 2012-06-30 14:21 — Ted Schrey Montreal (not verified)

Hell no, I don't blame Barclays alone, I'm not that petty, no, no, I blame all banks and financial institutions for having latched on to the notion they are dealing in a commodity, i.e. money; seems to me money ought to be providing the lubrication for commerce, rather than a main product. Treating money as commodity is like pouring oil in your tank, instead of gasoline. You won't get far-- as over the past few decades the economy hasn't gone far.

Sat, 2012-06-30 07:13 — thewestisthebest (not verified)

Don't just blame Barclays alone we can also blame Ed Balls. Before Labour starts pointing the accusing finger and calling for an inquiry in which Mr Balls will probably be the first witness. Labour's own financial record is somewhat tainted.

Fri, 2012-06-29 22:27 — Keri (not verified)

No jail time will come of it. Company fine/loss of bonus. It will happen again

Fri, 2012-06-29 18:26 — Swavesey Sage (not verified)

This whole mess must be referred to EU for investigation under Competition
rules. I have no confidence that any British led investigation will apply sufficient rigor, or cast the net wide enough to clean out the cess-pit the Bankers have wallowed in.

Fri, 2012-06-29 14:06 — Stephen101 (not verified)

Isn't the point Vickers really that playing around with the strcture of banks is an irrlevance. Whether the retail banking is ring fenced or investment banks ar separated is really an irrelevance if the bankers are going to collude with each other to support their short term interests. What is really needed is a sea change in culture and regulation of the financial sector, without it moving the deck chairs around really is an irrelevance that the City will easily circumvent.

Fri, 2012-06-29 12:19 — Tom MacFarlane (not verified)

There is not a snoball-in-hell's chance of any change in the structure of banking.

Those two Eton posh boys may be dancing to a populist tune currently, but, as the attack on Jimmy Carr demonstrated, it's all smoke and mirrors.

Banking IS the economy, that's our bigger problem.

Fri, 2012-06-29 10:25 — hugh markey (not verified)

Banking scandal - even better!

Diamond Geezer

Fri, 2012-06-29 09:09 — Stewart Eugene (not verified)

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Fri, 2012-06-29 08:15 — Yinka.Oyesanya (not verified)

It's not just a Barclays and banking scandal, the root cause of this problem leads all the way to New Labour. A few years ago when I worked on a major UK Bank's premises, I remember one evening after working hours when Peter Mandelson visited for a late dinner with the top brasses of that bank. The stench of this deceit leads all the way to New Labour. Let's remember that Tony Blair is the richest ex British Prime Minister on record and he was the Prime Minister then.

Fri, 2012-06-29 05:41 — matthew fox (not verified)

If RBS and Lloyds are guilty of the practices, they could end up with being bailed out again by the taxpayer.

Fri, 2012-06-29 01:27 — Rick Mc Callister (not verified)

If banking were a cooperative, rather than corporativist venture, it would serve the public rather than continually rip it off. It would be a more cost efficient, reliable and beneficial way of funding business, government and personal credit. There needs to be a sort of "credit union" at the corporate level where the users are the owners. I am a member of a credit union and am happy to receive my paltry "dividends" every year, instead of being nickled and dimed to death by a greedy private bank. You'd think big business would think the same way.

Fri, 2012-06-29 00:33 — Doogle (not verified)

If the fine of £59.5 m simply goes into the coffers of the FSA then the banks win again, since it's funded by them. With more cases likely to hit the fan shortly we should at least ensure that this fine is paid to the British people, not to the banks themselves.

Thu, 2012-06-28 23:55 — anon3 (not verified)

Make banking a profession.

Thu, 2012-06-28 22:45 — Dafydd Roberts (not verified)

Surely Section 2 of the Fraud Act 2006:

2. Fraud by false representation

(1) A person is in breach of this section if he—
(a) dishonestly makes a false representation, and
(b) intends, by making the representation—
(i) to make a gain for himself or another, or
(ii) to cause loss to another or to expose another to a risk of loss.

(2) A representation is false if—
(a) it is untrue or misleading, and
(b) the person making it knows that it is, or might be, untrue or misleading.

(3) “Representation” means any representation as to fact or law, including a representation as to the state of mind of—
(a) the person making the representation, or
(b) any other person.

(4) A representation may be express or implied.

(5 )For the purposes of this section a representation may be regarded as made if it (or anything implying it) is submitted in any form to any system or device designed to receive, convey or respond to communications (with or without human intervention).