(Reuters) – Bob Diamond squares up to critical British lawmakers on Wednesday, a day after quitting as Barclays’ chief executive over an interest rate rigging scandal, and could drag the Bank of England, government and rival banks deeper into the affair.
Diamond abruptly resigned on Tuesday just hours after Bank of England Governor Mervyn King and Financial Services Authority chairman Adair Turner effectively told Barclays Chairman Marcus Agius that the CEO was not the right man to reform the bank’s culture after the scandal, people familiar with the matter said.
Diamond’s testimony to a parliamentary inquiry could prove politically explosive; on Tuesday, Barclays published a 2008 internal memo from him that a senior manager understood to mean that the Bank of England and government might approve if they gave artificially low estimates of their borrowing costs at the height of the banking crisis to avoid giving the impression that Britain’s banks were in difficulty.
The estimates are used to compile the London Interbank Offered Rate, or Libor, a global benchmark that underpins financial transactions worth an estimated $360 trillion.
Barclays, Britain’s third-largest bank was fined $453 million for its part in manipulating Libor from 2005 through 2009 and has admitted submitting falsely low estimates from late 2007 to May 2009, while Diamond was its investment banking head.
The American banker is scheduled to appear before the cross-party Treasury Select Committee at 2 p.m. BST (0900 EDT).
Though his compatriots across the Atlantic will be celebrating a holiday marking their independence from Britain, Diamond said he “looked forward to fulfilling” his appointment with the parliamentary committee in London, despite having already resigned.
Barclays’ defense tactic of claiming official sanction for the period of manipulation covered by the market crisis drew a skeptical response from Britain’s finance minister at the time. Alistair Darling said he could not imagine the central bank asking Barclays to take such action and said his department would never “suggest wrongdoing like this”.
Diamond, Agius and Chief Operating Officer Jerry del Missier have all quit this week, although Agius is staying on to lead the search for a new CEO.
The bank said in documents released ahead of Diamond’s appearance that it was “ironic” that there had been such an intense focus on it alone, as it was the only bank to have settled with authorities after its “exceptional level of cooperation” over the global Libor investigation.
By 0850 GMT Barclays shares were down 1.3 percent, in line with a weaker European bank index.
“They were the first to receive the fine, so there is this rush to blame Barclays, but all the banks being investigated could be culpable,” said an investor in the bank who asked not to be named.
Barclays had handled the crisis badly and needed to find an external chairman and CEO to wipe the slate clean, he said. “They really need to demonstrate to shareholders and indeed the wider world, that they mean business and they are going to look very hard at their culture.”
BANKING SCANDALS
The Libor scandal comes at a time of increasing anger in Britain against the banks, already widely excoriated for their role in the financial crisis of the past few years.
Politicians and newspapers have seized on the scandal – which exposed macho e-mails between bankers congratulating each other with offers of champagne for helping to fiddle figures – as an example of a culture of wrongdoing in an industry that only stayed afloat with huge taxpayer bailouts.
Libor is a market benchmark published by the British Bankers’ Association (BBA) based on a survey of what banks tell its compilers they have to pay to borrow from their peers, in various currencies and for different periods. It is used to price financial contracts around the world, ranging from complex interbank transactions to consumer mortgages and student loans.
In the four years to 2009, when the authorities believe banks were lying about their borrowing costs to influence the Libor benchmark, some customers may have benefited, and others lost out. Some bankers may have manipulated the rate to profit in certain transactions. Much of the focus, however, has been on late 2008, when the Lehman Brothers collapse in the United States pushed global financial markets into crisis.
In that period, high borrowing costs for banks reflected a loss of confidence that managers – and governments – were trying to shore up, creating a temptation for bankers to report lower interest rates to the BBA than they were actually having to pay.
OFFICIAL ENCOURAGEMENT?
The 2008 memo suggests that Barclays was given implicit encouragement by BoE deputy governor Paul Tucker to lower its contributions to setting Libor during the peak of the financial crisis to present a better picture of financial health.
According to the memo, Tucker told Diamond he had received calls about the Libor rate and banks’ submission for it from senior government officials. “It did not always need to be the case that we appeared as high as we have recently,” Diamond said he had been told.
The memo was a “file note” produced to make a record of important conversations. Diamond only wrote a handful of them in his 16 years at the bank.
The Bank of England declined to comment.
Barclays’ agreement to pay fines last week increased pressure on other banks to cooperate in a probe that could cost the industry billions of dollars.
The Libor figures submitted by banks are compiled by Thomson Reuters, parent company of Reuters, on behalf of the BBA.
(Additional reporting by Steve Slater, Sinead Cruise and Raji Menon; Editing by Will Waterman)