The Libor Affair; why it is not a scandal, and why we should not hype up an inquiry.

By Alex Bryan

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Before Barclays was fined for fixing the Libor rate on June 27, few outside of banking or economics would have even known what it was. Soon though, we all had a fair idea. Yet despite the fact that Barclays is known to have manipulated the rate, and the ongoing investigations into numerous other high-profile banks in the U.K. as well as abroad, the sheer significance of what has occurred still does not appear to have sunk in. The exposure of the Libor fix (and the apparently continued attempts to fix it over many years) has the potential to be the most important story since the banking crash of 2008.

The particular significance of the Libor rate, and why it matters to all of us, has been covered in great detail elsewhere. The importance of this matter extends far beyond the rate of lending between banks in London though. The Libor affair shows us the naked truth of banking culture, and indeed, it shows us the result of what has become popular financial culture when pushed to an extreme where no restraints apply.

This is why it is a mistake to label it a scandal; to do so implies that it is surprising, that it is a shock to the sensibilities of usual banking practices. Yet, as Will Davies writes in his excellent piece on the subject, ‘on what basis, really, did any of us expect pleasure-seeking individuals, far from the disciplining reach of any market, trading paper whose value had nothing to do with utility or human need, to do anything other than manipulate perceptions of that paper’s value?’

The popular confidence in the traditional elite is at least on a superficial level at a low ebb. Though signs of active resistance to established authority have not emerged, there is a common feeling among the population that the political and financial elite live in a different world to the rest of us, a world where there is only reward, and any negative consequences can be relegated to the general population.

This is Ed Miliband’s reasoning for saying that a Parliamentary inquiry into the Libor affair is not enough. He is right. Politicians are one of the few groups which can challenge bankers in terms of public disdain. To allow Parliament to control the inquiry would be inward-looking, ineffective (as politicians are not as good as cross-examination as lawyers) and doomed to failure. The public would have no faith in such an inquiry – even if it were successful in some ways, it would still look like an establishment cover-up.

It would perhaps seem obvious then that we should have a public inquiry, led by a judge. However, this would simply be widening the net slightly, so as to include a slightly wider set of elite figures into the process. Lawyers and judges are slammed daily in Parliament by MPs, and have a fairly low standing amongst the public at large too.

More important than this though, is that any such inquiry is unable to truly get to the heart of why the Libor affair occurred. Miliband says that a public inquiry should be ordered into the ‘culture of banking’ in the U.K. This seems similar to the Leveson inquiry, which is nominally investigating the ‘culture, practices and ethics of the press’. In actuality though, it is looking chiefly at a very narrow case; that of phone-hacking at the News of the World and possibly other organisations.

Surely the same would occur in Miliband’s inquiry into banking culture. There is simply too much to look at for an inquiry to be completed quickly enough to still be relevant. Therefore, it would morph into an inquiry into the Libor affair, with a few strongly-worded paragraphs about the culture of banking tacked on at the end. This would not be helpful. Though it is obviously important to look at the Libor affair, and see who was particularly active in it, this should remain separate from the significantly more important and urgent discussion of banking culture and practice.

With regards to the Libor rate, the Economist proposes two reforms which might help stop manipulation in the future. The first, to fix the rate based on actual lending data rather than estimates, is an excellent proposal which should have been implemented as soon as a computer was able to do such calculations. The second, to broaden the number of banks (currently 18) setting the rate, should also be introduced, but it should be done so cautiously and with the knowledge that it is only a minor reform. The new banks brought in to contribute to the setting of the Libor rate would have similar motives to have a low rate as the ones currently setting the standard, and they would belong to the same culture of banking which is being so widely condemned.

This culture, it seems, is the main issue, and it is why no inquiry can be truly effective. The Libor affair was a manifestation of a banking system entirely dependent on risk. More worryingly though, it is the result of a banking system over which the British government has very little jurisdiction.

Barclays may have been fined, but Deutsche Bank, Citibank, HSBC, RBS, JP Morgan Chase and UBS are all currently under investigation. Authorities from Japan, Canada, Switzerland, the EU and the U.S.A. are all looking into the role of their banks in the affair. Global banking has been allowed to become a creature bigger than governments, bigger even than nations. It is a beast we depend upon, but which gives us less than we deserve.

It is also a beast we cannot control. What we have is a network of sordid institutions, becoming more incorrigible and less socially useful by the day. In Britain we could legislate so that the Libor rate was set in a different way, but this would not fix the wider problem of a banking system and culture which not only allows the Libor affair to happen, but positively encourages it.

So whilst it is important to have an inquiry specifically into the Libor affair, such an investigation would be no remedy for the state of banking in general. Neither a public or parliamentary inquiry will come to a conclusion which even acknowledges that what is wrong in banking culture is endemic, not just the result of a handful of rogues. To inquire into the Libor affair would be to do just that; it would have no effect on the wider culture which seems to be the root of the problem.

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