The largest financial fraud ever attempted
Published on Sat, 2012-07-14 22:08
Marcus Agius was called in 2006 to manage the rescue of Barclays Bank, a British firm on the verge of bankruptcy due to irresponsible financial bets. Six years later, on Monday 2 July, the City woke up to the news of the resignation of Agius to all his public and private offices due to “unacceptable behavior within the bank”… nothing less than the largest financial fraud ever attempted, a white-collar theft of billions of dollars that has duped governments around the world and ultimately impoverished millions of people who never heard of Agius, Barclays or the City of London and just happened to have borrowed money from a bank.
The column written about this case by Roberto Bissio, coordinator of Social Watch, for Agenda Global, reads as follows:
Marcus Agius: A rotten apple or an infected garden?
Marcus Agius is a gardener. His passion for plants led him to the presidency of the Royal Botanic Gardens, Kew, founded in 1759 by Princess Augusta, mother of King George III, currently with over eight million specimens in its herbarium in London.
Marcus Agius was appointed in 2006 as the first non-executive director of the BBC, a keeper of the integrity of the broascasting. That same year Agius was called to manage the rescue of Barclays Bank, on the verge of bankruptcy due to irresponsible financial bets. Continuing the tradition of his father in law, Edmund de Rothschild, also a passionate for horticulture and a prominent member of the family of financiers who made the City of London the reference of global banking, Agius combined business management with philanthropy and moral preaching.
Held as a model of elegance and good manners, Agius often changed his tailored suits for khaki pants and a wicker hat to be photographed shaking hands with beneficiaries of Barclays' assistance programs in slums around the world and thus promote "corporate social responsibility."
When the global financial crisis erupted in 2008, Barclays Bank was one of the few that did not needed an official bailout, because Agius negotiated its partial sale to several Arab emirs. Explaining the causes of the global crisis, Agius said that “they saw so much money being made in investment banking and trading, they said: 'I must have some of that,' and they just didn't have the historical experience or the deep-down culture."
The first Monday of July, the City woke up to the news of the resignation of Agius to all his public and private offices. "Unacceptable behavior within the bank," he explained, had been penalized with a record fine of 455 million dollars and resulted in "a devastating blow to its reputation."
The "unacceptable behaviour" is nothing less than the largest financial fraud ever attempted: the manipulation of the LIBOR rate, a white-collar theft of billions of dollars that has duped governments around the world and ultimately impoverished millions of people who never heard of Agius, Barclays or the City of London and just happened to have borrowed money from a bank.
After years of detective work, both in London and in New York, involving not just the financial regulators but also the FBI, Barclays became the first bank to be fined for its wrongdoings, but a dozen other big financial institutions are also being investigated. On top of the bulky fines, which in case of Barclays amounted to around 10% of their profits of 2011, once the fraud is proven the participating banks are likely to be sued by their victims, which can mean huge class actions.
Bob Diamond, the chief executive of Barclays could not claim ignorance of the illegal operations and was forced to resign, first to his job and then to his 20 million pounds bonus payment for this year. In spite of his resignation Agius will lead the board in search of a replacement.
Libor stands for London interbank offered rate, which is the average rate at which major banks in the British capital lend money to each other. Financial transactions worth over 800 trillion of dollars, from governmental bonds to simple house mortgages, all are contracted regularly with interests rates based on Libor. A small variation up or down makes the balance between debtors and creditors to oscillate in the millions. The euro area has its Euribor and Japanese finance its own index, but six decades after the end of the British Empire, Libor continues as the global benchmark.
The Libor manipulation makes the Madoff 's fraud on Wall Street or the manipulation of deficit numbers by the Greek government appear like minor misdeneamors and some analysts are already talking about “the biggest scam in history.” The cheating happened over several years and the modus operandi was surprisingly simple.
Libor is calculated every day by order (and under the supervision) of the British Bankers' Association, which was coincidentally chaired by Agius, until the scandal exploded. The daily number is averaged by the Thomson Reuters news agency, and it is not based on the actual operations of banks lending and borrowing to each other, but on the answers of big banks to the question of what rate they would pay if they were to borrow money today.
Together with several similarly indebted big banks, Barclays manipulated Libor down with bogus offers. In some cases this was done to favour traders in the derivatives markets: “Dude. I owe you big time! Come over one day after work and I am opening a bottle of Bollinger” (champagne) says one of the interbank e-mails now offered as evidence. Most of the time Barclays artificially lowered the Libor to avoiding having to pay high rates for its enormous debts. Parliament now investigates how this fraud could be carried out unnoticed for several years, jeopardizing the credibility of British banking.
The manipulation helped hide the real financial situation of Barclays and other heavily indebted huge banks, making them appear more solid than they really are and easing the pressure for reform.
A week before the scandal, the Bank of International Settlements, warned in its annual report that "banks must adjust their balance sheets to reflect the real value of their assets and ensure a rapid recapitalization" (an honest assessment which can be fatal for many institutions). The BIS, which is the central bank of central banks around the world, argues that "governments must reform the banking system and limit its size and importance" to ensure that in future the bankruptcy of a bank does not trigger a new financial crisis.
Chakravarthi Raghavan, Editor Emeritus of SUNS in Geneva, sees nothing new here: the BIS "has identified these problems in the past and proposed remedies." However, the medicine is never implemented because "the financial sector has captured the political process."
The British Parliament must decide now if the Libor case is explained by the traditional metaphore of the rotten apple present in every basket or it likens more a fungus that has infected greenhouses massively... carried around by the gardeners.