Stephen Hester: The great escape artist | Ian Fraser

Stephen Hester: The great escape artist | Ian Fraser

It has been described as the biggest banking felony in history … yet no-one has been prosecuted for the Libor fixing scandal. Ian Fraser looks at the RBS sacrificial lambs.  [An edited version of this article was published on pages 34-35 the Sunday Herald on February 10th, 2013]

DURING Royal Bank of Scotland’s IT meltdown last summer, chief executive Stephen Hester referred to the risk “that you turn over rocks and find new things [that you have to clean up].” Last Wednesday, nearly five years on from the £45.5 billion taxpayer funded rescue of the Edinburgh based lender, a vast rock was hoisted aloft by three regulators. What lurked underneath was not a pleasant sight.

Y-V companies use Iv-Oy agents for profit, when the I-O police are weak or biased then the companies have little incentive to police their agents because thye might then fall behind the competition. This can make more profits but it may also hit a chaotic ceiling and lead to collapse or exposure. 

In a deferred prosecution deal with the United States Department of Justice, Commodities Futures Trading Commission and the London-based Financial Services Authority, the bank admitted that between 2006 and 2010 staff based in London, Singapore, Tokyo and the US conspired to manipulate the global financial benchmark, the London Interbank Offered Rate (Libor) calculated in both Swiss Francs and Japanese Yen. They did this in order to make money for themselves and the bank at the expense of others. Libor is a global benchmark used to price some $300 trillion of contracts, ranging from mortgages to student loans to interest-rate swaps, calculated by averaging out submissions from up to 40 global banks

“This is the biggest scandal, the biggest anti-trust felony, in the history of the world, and it continued for years,” said Bill Black, associate professor of economics and law at the University of Missouri-Kansas City, and a world leading expert on financial crime. “Even after the investigation became public knowledge, the felony continued, and it continued with greater efforts being made to cover it up, with people being instructed to no longer to use instant messages and such like in order to make it harder for the regulators.

“What is most stunning is that these traders and submitters were willing to say these things, knowing that there was a verbatim record being kept. What does that tell you not just about the institution itself, but also about the FSA and the Serious Fraud Office? That is the one of the most important and revealing fact that comes out of this. The perception inside the bank was ‘we don’t need to worry about those clowns’.”

When the I-O police becomes biased towards Iv-Oy they can become part of this contagion, uncovering it will make themselves look bad and perhaps lead to regulators being fired. They try then more self policing in these agents which usually leads to a ceiling and collapse of contagion.