Too little, too late: Regulating finance after the Barclays scandal

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Adam Smith's "invisible hand" to organize the market and make it work smoothly isn't really that invisible after all! I can even go further by declaring that there are several "real" hands working frantically to keep a special key interest rate, the Libor, artificially low.

Isn't that clear evidence that our financial markets are less and less transparent and more and more involved in fraud cases? Where are all the studies about capital markets efficiency and how can they still be valid after these recent reports in the media? For the skeptical, no, this is not a conspiracy made by radical anti-capitalists determined to destroy the world. It is a sad story, not a story of few "rotten apples," but unfortunately a story revealing every day new symptoms of a chronic disease.

After an investigation, Barclays, the old and once prestigious British bank, recently admitted manipulating the Libor rate to artificially increase the profits of traders (or, alternatively, keep them at minimum) not only during the credit crunch of 2007-2008 but as far back as 2005.

The Libor, the London Inter Bank Offered Rate, as well as its European counterpart, Euribor and the Japanese counterpart, Tibor, are special rates offered by banks to lend money to each other for a very short time (usually overnight) in a particular currency. These rates affect a wide range of interest rates in the world and other related financial products, especially the one used for short-term financing.

Prior to this scandal, very few people had heard of these special rates or had a good understanding of them, unless they worked in the financial sector. These rates are crucial in pricing derivatives. Derivatives which were initially used to transfer risk from one market player to another are becoming the instruments of speculation par excellence -- one of the most "dangerous" products in the financial markets. It is not for nothing that Warren Buffet, the most successful investor of the 20th century, once declared, "In my view, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal."

These products are extremely interest-rate sensitive. That means every single tiny percentage increase or decrease in the interest rate will have a big impact on derivative prices. However, the real impacts of these super sophisticated financial products are not only limited to the balance sheets of the banks; they also hit the pockets of average people. It is estimated that the Libor rate affects trillions of dollars worth of assets in the world. The mortgage rates, the student loans, the credit cards rates, the pension funds of millions of workers are all affected by this blatant manipulation.

It is ironic that during the 2009 financial crisis, Barclays refused to participate in the U.K. insurance scheme, initiated by the U.K. government, to save the banks from their toxic assets. At the time, Barclays officials kept claiming that their institution did not need the funds and that it was "flush with liquidity." Later, Barclays chose to raise funds from Middle Eastern investors, mainly Qatari, to get out of the crisis.

Still, Barclays kept insisting it had no problems. Instead, it showed to the market that it was making huge profits. Indeed, it was the contribution of the Barclays Capital investment banking business (the Barclays branch headed by CEO Bob Diamond who has just resigned because of the scandal) that made nearly half of the group's overall pre-tax profit for 2009. Were these real profits or simply over-inflated ones as a result of keeping artificial low rates?

That same year, Bob Diamond decided to forgo his multi-million pound bonus as a way to acquire credibility in influencing the new economic regulations. He declared to the Financial Times: "We want to be part of the debate on the future of global regulation and the economy."

Unfortunately, his generosity stopped there. Indeed, in 2011, he accepted $39 million in total remuneration and, since joining the Barclays board in 2005, it is estimated that he has taken a total of $311.7 million in salary, benefits, bonuses and share awards. This sum is only a few millions less than the $453-million fine Barclays just agreed to pay as settlement for this discovered fraud to three regulatory agencies: Britain's Financial Services Authority (FSA), the U.S. Commodity Futures Trading Commission (CFTC) and the U.S. Department of Justice.

Unfortunately, this story doesn't end here. Other banks such as HSBC, Deutsche Bank, Credit Suisse, UBS, JPMorgan Chase, Citigroup, Bank of America and many others are being investigated for the same shadowy practices and eventually other scandals may soon be revealed.

Amidst all this turmoil, no official was charged with fraud or crime. No public inquiry was launched to determine any suspicious relationship between financial institutions and politicians. When Bob Diamond was invited to testify in front of British parliamentarians, some politicians showed a lot of frustration and incredulity. Is it really possible that all the politicians were in the dark for such a long time?

Immediately after the financial crisis of 2008-2009, many economists called and appealed to decision-makers for more regulations of the financial markets. Also, many voices kept asking for the introduction of the Robin Hood tax as an efficient tool to tame the ardour of the traders in financial transactions and collect funds for times of need and bailout packages. Politicians first dithered, hesitated and finally refused, thus bowing to the lobbying of the CEOs of banks or some hard right-wing neoconservative economists, staunch believers in an absolute free market. How many more financial frauds and scandals are we going to watch helplessly, blaming it on the actions of a few greedy actors?

On July 9, a few days after the fraud was discovered at Barclays, Michel Barnier, spokesman for the EU commissioner in charge of financial reform, mentioned that there are talks to propose new rules that would criminalize the manipulation of benchmarks such as Libor. This action should have been taken a long while ago. Too little, too late...

Monia Mazigh was born and raised in Tunisia and immigrated to Canada in 1991. Mazigh was catapulted onto the public stage in 2002 when her husband, Maher Arar, was deported to Syria where he was tortured and held without charge for over a year. She campaigned tirelessly for his release. Mazigh holds a PhD in finance from McGill University. In 2008, she published a memoir, Hope and Despair, about her pursuit of justice, and in 2011, a novel in French, Miroirs et mirages.

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