The explanation at Barclays as to who knew what and when still doesn’t stack up – and none of the possible scenarios are very palatable (updated 16 July 2012)
Diamond: an appropriate screensaver from a certain @nelliediamond at Deutsche Bank in New York
Nearly three weeks after US and UK regulators detonated a $450m bomb under Barclays and the rest of the banking sector – and after hours of erratic grilling of its senior executives by British MPs – there is still something distinctly fishy at Barclays.
Despite a two year trans-Atlantic investigation, detailed statements from the regulators, Barclays reviewing 22 million documents and spending £100m on its own inquiry, and the reluctant resignation of the bank’s chairman, chief executive and chief operating officer, there is still little clarity over perhaps the most important question of all: how much did the most senior management at Barclays know about the bank’s deliberate misrepresentation in its Libor submissions between 2007 and 2009?
Set aside the attempts by derivatives traders at the bank to cyncically manipulate Libor for the benefit of their own trading positions between 2005 and 2008. Barclays says that as soon as senior management found out about this, it was reported to the authorities. The statements by the FSA and CFTC give no cause to disbelieve this.
And let’s set aside the pantomime of the past few weeks in which Marcus Agius resigned as chairman a few days after he insisted he was going nowhere, only to temporarily unresign the next day; in which Diamond resigned despite his chairman having assured us he had done nothing wrong; and in which Jerry del Missier, one of Diamond’s key lieutenants in the Barclays project over the past 16 years, resigned for being the most senior manager to give the instruction for the bank to lower its Libor submissions. (This pantomime has been excellently skewered here by Simon Nixon at Heard on the Street).
The ‘lone wolf’ scenario?…
We are left with three uncomfortable scenarios. On Barclays’ account, its most senior management – in other words Diamond, former chief executive John Varley, finance director Chris Lucas and the board of directors – were unaware of the deliberate manipulation of Barclays’ Libor submissions. Diamond said he was unaware of it until ‘a few days before the bank was fined’ (ie. last month).
We know from the CFTC’s statement (page 20) that senior managers in the group treasury functions (then run by Jon Stone, who reported to Lucas), instructed Libor submitters to lower their rates in September 2007. We also know that del Missier had ‘misunderstood’ a conversation Diamond had with the Bank of England in October 2008 as an instruction to the bank to artifically bring down its Libor numbers, and that he passed it on as an instruction to the then head of money markets at Barclays, Mark Dearlove. We also know that Varley received a copy of the memo of his conversation with the Bank of England.
So on this reading, Barclays would have us believe that the instructions from group treasury in 2007 to lower Libor submissions were never raised with the treasurer (unless he gave the instruction himself), and if they were, they were never passed up the line to Lucas, and never discussed with Varley, Diamond or del Missier.
More than a year later, when del Missier instructed Dearlove to tell the Libor submitters at Barclays to reduce the bank’s Libor numbers, none of them pointed out to him that they had already been instructed to do so in 2007. And again, none of them flagged up this unusual request with the group treasurer. Or, if they did, he did not flag it up with his boss Lucas. Or if he did, Lucas did not raise it with his boss Varley. At no point did del Missier tell Diamond that he had followed up the memo with an instruction to lower Libor, and at no point did Varley follow up on the memo.
We have also learned that in October 2008, the money market team flagged up del Missier’s instructruction with the then head of compliance Stephen Morse, but he – apparently – told no-one.
In other words, at no stage – despite the negative press coverage about Barclays, more than two years of internal and external investigation, and regular contact with regulators at which concerns were raised over other banks low-balling on Libor – did knowledge of the explicit instructions to lower Libor extend beyond the level of ‘senior managers’ in the treasury department or del Missier. It never reached the executive committee (otherwise Diamond would have known about it), let alone the board. It didn’t occur to any of the most senior executives to ask what Barclays was doing with its own submissions, and it didn’t occur to anyone lower down to tell them.
The ‘cover-up’ scenario?…
However unlikely the above scenario – and the chairman of the Treasury Select Committee Andrew Tyrie has described Diamond’s testimony as ‘somewhat implausible’ – the alternative is even less savoury. Under this scenario the treasury department might have bounced this decision off the finance director in September 2007, and del Missier or Varley might have discussed the memo with Diamond, if only in passing in the corridor of the Barclays executive suite. The head of compliance might have flagged it up with his senior managers.
Varley might have flagged up the memo with his finance director, who we might already have heard about it from his treasury department or have spotted that the bank’s Libor submissions had fallen sharply. Together, they might have brought it up an executive committee meeting and they might have decided to seek the advice of an old City hand such as Agius.
Barclays will only say that there is nothing in the reports by the FSA or CFTC that refers to the most senior management having idea this was going on, which is not quite the same as saying they didn’t know.
If we are to believe the first scenario, Barclays displayed a staggeringly casual approach to management which sits uncomfortably with Barclays success over the past decade.
But the second scenario contradicts Barclays’ initial claims – and Diamond’s statements – that its most senior management were completely unaware that for nearly two years the bank had been deliberately low-balling its Libor rates. If this scenario is in fact closer to the truth, it suggests a deeply disturbing cover-up at the very top of Barclays, which has far deeper implications for the bank.
And the conspiracy theory…
This is where the regulators come in. Barclays says regulators were aware of the initial instruction from group treasury to lower Libor submissions in September 2007, and knew that del Missier was the executive who gave the instruction, yet were happy to take no direct action against him. Indeed, they approved his promotion last month to become COO.
This is turn hints at an altogether more unpleasant scenario: that in exchange for cooperation and a swift settlement by Barclays, aware of the lack of regulatory action over repeated warnings over Libor, and wary of setting a precedent for any other banks still to settle, regulators were complicit in any cover-up and / or agreed some form of deal with Barclays that they would not demand the resignation of senior executives as part of the settlement.
When the Bank of England and the FSA slammed Barclays last month as being representative of the cultural decay in the financial markets – which increased the pressure on Diamond and Agius to resign – executives at Barclays considered that this cosy agreement had been broken, and decided to go on the offensive.
As one MP put it succinctly to Diamond: ‘You were either complicit, negligent or incompentent’. We still don’t know which of these is the best explanation.
Barclays has admitted it lied deliberately and consistently about its Libor submissions for years, but its explanation still leaves the sense that it is not being entirely open about who knew what and when. Perhaps now it should go back to the beginning and tell tus the full story again.
