In her new book, ‘Holding Bankers To Account,’ Oonagh McDonald reveals how the financial markets were rigged in the 2000s and sets out the reforms that still need to be implemented. Review by Stephen Williams.
In 2012, news that the London Inter-bank Offered Rate (Libor), a benchmark interest rate widely used in the global financial system for a broad range of financial products and contracts, had been manipulated since at least the early 2000s stunned the financial community. Some estimates put the total global value of the contracts based on Libor at as much as $800 trillion.
The Financial Stability Board, an international body that monitors and makes recommendations about the global financial system, said that such manipulation posed “potentially serious systemic vulnerability and systemic risk” to the global financial system.
So the revelation that this critical benchmark was rigged plunged public confidence in the banking system to new lows, shortly after the international banking crisis of 2008.
Weak control systems
Author Oonagh McDonald’s account of this sorry saga anchors a timely book that looks at how the industry’s reputation plunged to such lows – and what it needs to do to account for its past failures and move on.
“My aim it to show that it was possible for such price fixing to take place over so many years only because the major banks operating in the UK, the USA, Germany, Japan and Switzerland had such weak systems and controls, or worse, no systems and controls at all. Potential conflicts of interests went unrecognised for years. Compliance officers were at best ineffective and at worst collusive,” she argues.
McDonald, now based in Washington, DC, is a former UK MP and was a non-executive director of the Security and Investment Board, which morphed into the Financial Services Authority in 1997. She is recognised as a world authority on financial regulations.
In order to delve into the background of the issue, McDonald begins with a history of financial regulation in the UK. She counters the traditional assertion that deregulation began apace in the 1980s, instead arguing that the government’s “light-touch” regulation of the early 2000s meant that banks were ill-prepared to meet the financial crisis. The catastrophe provoked many banks to prioritise profits over security.
“In its aftermath, as the banks embarked on the slow path to recovery, making profits was essential. The traders seized that opportunity, and it may well be the case that banks were simply relieved that some areas of their business were profitable.”
The depth of the traders’ deceit is laid bare through a detailed account of the scandal, which includes excerpts from traders’ emails and internet chatrooms as they conspired to alter the rate.
The book also deals succinctly with the aftermath, totalling up the fines levied around the world as the scandal was uncovered and regulators scrambled to mollify an outraged public already furious with bankers.
Given the scale of the malfeasance, many citizens are amazed at the apparent leniency of the treatment meted out to bankers.
The book argues that though banks have been fined and a few traders have been jailed, justice will not be done until senior bankers are made responsible for their actions.
“The public saw a handful of traders tried and jailed (and sometimes set free on appeal) and a few senior bankers resigned or were asked to resign, while retaining comfortable pensions and even bonuses,” argues McDonald.
This call for responsibility and accountability has been echoed elsewhere. Appearing as a witness before the UK’s Parliamentary Commission on Banking Standards in 2013, Andy Haldane, then executive director for financial stability at the Bank of England, emphasised the importance of sanctions in encouraging those at the most senior levels to assume responsibility.
“Not knowing cannot be a legitimate excuse,” he said.
“If it was made clear that, whatever the product or asset, if it is not doing what it is meant to be doing, the sanctions will be meted out at the highest level of the firm and that those incentives would run down the core of the firm from the top, that would help. I think that if the chief executive or the chief risk officer or the chief operating officer, knew that their job was on the line their behaviours would rub off all the way down the organisation.”
Road to reform
McDonald concurs. In part four of the book, she sets out the reforms which have taken place to ensure that benchmarks are once again reliable indicators which can command industry and public confidence.
Yet she argues that the scale of the reforms and their implications remain poorly understood. While reforms imposed externally can play a key role, McDonald argues that banks must themselves take the lead in changing their culture to ensure comparable scandals can never happen again.
“The argument of the book is that the final steps must now be taken,” she says. “The banks must also reform themselves. These steps must include mandatory changes both in corporate governance and in the structure of systems and controls… these should be applied to all major global banks.
“It is only when senior managers are individually responsible that the reforms outlined here will take full effect.
“The banks themselves should not regard these reforms as external impositions but internalise them, thus becoming well managed banks capable of restoring public trust.”
Even as the outrage of the post-crisis years dims and public interest fixes on other scandals, the vital importance of accountability and embracing corporate reform is a message that ought to resonate well beyond the banking sector.