As I read the report published by the Financial Services Authority (FSA) for the fine of £59 million against Barclays Bank for the recent LIBOR fixing scandal, I was struck by how Bob Diamond’s letter to Andrew Tyrie seemed to confuse and avoid the issues. In a sense, what Diamond letter shows is the flawed culture. His letter does not show a corporate culture that will obey the rules and build trust. The letter instead shows a near pathological inability to reflect the reality of the situation and accept responsibility for what is wrong. Instead, the issue is downplayed. The contrast between the FSA report and Bob Diamond’s letter raised three distinct points. The first is the apparent cause of the issue. The FSA and Diamond point to different causes. The second is the importance that Diamond and the FSA give to Barclays’ cooperation with the FSA. Instead of reassuring us, it raises questions about both parties. The third is about the failure of Barclays’ culture. The fine and Diamond’s letter to Andrew Tyrie undermine the claim that Barclay’s is a good corporate citizen with a robust corporate culture.
What caused the Barclays’ LIBOR crisis?
The first issue is the apparent cause of the LIBOR manipulation and the associated crisis. The FSA report seems to accept the claim by Barclays (paragraph 13 and in more detail paragraphs 108-128) that senior managers were concerned with negative media coverage during the financial crisis. They then instructed junior managers illegally setting the LIBOR bids lower. Senior managers feared negative media comment on the bank’s LIBOR position would damage the bank. We do not have any explanation for this or have any assessment of this risk. We are given this explanation at face value.
The argument is that the lower bids would improve Barclays’ LIBOR position. The lower bids would support its reputation for liquidity at a critical time. The claim itself is striking. One would not expect senior managers as sensitive to media comment. What is also striking is that the FSA report could not find the origin of these important (illegal) instructions. What is clear from press reports is that unit making these decisions was in the department (Barclays Investment Banking) for which Bob Diamond had overall responsibility. This leads us to the other problem within the cause of the crisis.
In the letter to Tyrie, Diamond has blamed the problems on a few “rogue employees”. We return to a theme seen in the News of the World scandal. We are now to believe rogue employees were responsible. Yet, if anything, the rogue employee defence is a managerial failure. In the FSA report, the rogue employee defence is not sustainable. The report points to the failure of controls and systems for checking the LIBOR rates process complied with market rules (paragraphs 146-161) In many cases, the FSA report contradicts Diamond’s view by showing that senior manager were actively avoiding compliance issues (see paragraph 172). When compliance did meet the FSA, they avoiding telling the FSA that Barclays submissions were false (see paragraph 173). In the face of the FSA report, we can see that Barclays’ culture was fundamentally flawed. The ethos was to protect Barclays, and not comply with the law, and senior managers were complicit in the decisions. The issue is not isolated but cultural.
The senior managers were sensitive to negative media, which also reflects the culture within Barclays. On one level, their sensitive to negative media coverage makes sense. The market is volatile and rumours can quickly turn into a reality when markets believe and act on negative news. Yet, the underlying reality, the truth of Barclays situation seems to have been overlooked. Either Barclays was sound, and could prove it, or it was not sound and no amount of manipulation would change that fact. If Barclays was sound, why was it concerned with the negative media to the point it would undertake illegal activity. We can see through the FSA report that Barclays was not sound when it claimed to be in 2007 and 2008. Instead, if its LIBOR rates were correct, it was under the same or more stress than its cohort.
In many organisations, especially political ones or ones that rely upon public confidence, there is sensitivity to the media’s messages. Yet, in healthy organisations, the leadership can separate the noise, the general comments about the business, from the clear signals, what the market is telling them through their share price. They have integrity and do not bend to the pressure. The leaders can keep their word despite the negative media speculation. When Lehman Brothers collapsed, it was because no one would take their word for what they could deliver in their deals. They could not keep their promises so any promise their valuations, for market assets, were no longer believable. By contrast, we are led to believe that Barclays was not in as serious trouble at that time. If Barclays was not in serious trouble, why was it unable to convince the market? Why did it have to act illegally?
What also indicates the flawed culture is how the senior managers behaved. The senior managers were constantly checking to see if Barclays was an outlier. The behaviour raises further unsettling questions about the culture about the organisation’s response to regulations. Do we see, in effect, the fixing of regulatory behaviour? The larger question is whether this happens in all regulated industries. Are the companies actively cooperating or colluding to avoid the regulator? Is there a natural instinct to collude and cooperate against the regulator, the customer, or the public?
Is the FSA a weak regulator trying to recover from past mistakes?
The second point that is striking within the report is that the FSA compliments Barclays for extremely good cooperation (paragraph 21). On the surface, this makes sense. The FSA, as would any regulator, wants to encourage companies to cooperate. The level of cooperation will be considered a mitigating factor when the penalties are to be assessed. By encouraging cooperation, the FSA can make be a more effective regulator because cooperation reduces the resources it has to commit to taking punitive action. However, a deeper issue emerges when one considers this investigation against the previous investigation by the FSA into the Royal Bank of Scotland (RBS).
In the RBS investigation, the FSA highlighted a number of flaws within its regulatory approach. What one has to consider is whether the same regulatory issues that limited its ability to oversee RBS contributed to its inability to oversee Barclays. In that scenario, the FSA, already stretched by having to deal with Northern Rock and the RBS, would find it useful to have Barclays cooperate. The FSA would not want to have a drawn out investigation given the fallout from its RBS report. Moreover, it would not have seen a need to do that, given that the political direction that it followed was for light touch regulation. (See paragraphs 682-690 of the RBS report).
The deeper issue reminds us that the problems in Barclays were happening at the same time as Northern Rock, and RBS were falling apart. The LIBOR crisis was not an event that happened afterwards. In effect, we are seeing a shambolic regulatory system. The fine gives the appearance that the FSA has improved and it is now a robust regulator, but that only masks the underlying issue. The fine is large and appears at an opportune time, to reassure the market that the regulator is in charge. However, does it demonstrate that the FSA has moved beyond the shambolic regulatory framework that contributed to these problems? In a word, is the FSA now a better regulator or is it still cleaning up the mess from the previous 10 years?
What one has to consider a deeper problem presented by the eagerness to cooperate? Barclays may have cooperated with the FSA to avoid greater scrutiny. The regulatory subject will have an incentive to appear as cooperative as possible to avoid greater scrutiny. One has to consider that Barclays showed an ability to manipulate the regulators in the past. If they could do once, they would certainly have an incentive to do it again. They may be showing their eagerness to cooperate to keep larger or more intractable issues from being seen or investigated. At the same time, one has to ask, as above, whether the FSA has the regulatory capacity to dig deeper into Barclays given the size of the problems across the industry.
Would you want Barclays’ corporate culture?
The third problem with the report is how badly it reflects on the culture at Barclays. Bob Diamond reminds us that culture is what sets Barclays apart from its competitors. In 2011, he gave the Today Business Lecture in which he claimed that banks could learn the lessons to be good citizens. He claimed that they needed to rebuild the trust.
And to rebuild trust, in my view, three things must happen.
First, we have to build a better understanding of how businesses and banks work together to generate economic growth; second, we have to accept responsibility for what has gone wrong; finally, most importantly, we have to use the lessons learned to become better and more effective citizens.
In professing that Barclays was a good corporate citizen, trustworthy, and honest, he was describing an illusion. The culture within Barclays was not one that would engender trust. Aside from the various examples within the FSA report of the lack of corporate controls and the almost non-existent concern over the illegality of what was being done, the following example is indicative of the culture.
Three Money Market Desk managers were asked who was responsible for having adequate controls in place to avoid the problems seen.
149 In addition, during the Relevant Period, there were no clear lines of responsibility for systems and controls on Barclays’ Money Markets Desk. The FSA interviewed three different managers with some responsibility for the Money Markets Desk. Each gave a different answer when questioned as to who was responsible for ensuring that there were adequate systems and controls on the Money Markets Desk. None of these managers accepted that they had responsibility.
The gap between Diamond’s public claims and the private reality within his organisation is stark. Managers did not know who was responsible for having systems and controls in place to avoid illegal activity. In such a situation, the gap between the rhetoric and reality raises the question whether Bob Diamond knows what is happening and only says publicly what will improve Barclay’s reputation. The other option is that he does not know what is happening within the bank. Either position undermines his leadership and his claims regarding the corporate culture. What should concern investors, shareholders, and customers are his repeated claims that Barclays is a good corporate citizen.
Bob Diamond’s focus on corporate culture and good corporate citizenship is more about the appearance of the issue than the reality. A robust corporate culture would have seen the issues would have been reported sooner. In robust corporate cultures, rogue employees are rare. Where the culture works, the systems, the procedures, and the underlying way of working stops rogue employees. Instead of taking responsibility and explaining that the culture failed and his leadership failed, Diamond looks for scapegoats. His behaviour bears an uncanny, and unflattering, resemblance to Fuld and Goodwin He has justified or explained the scandal by arguing that it was employees trying to protect the company at a critical time. Alternatively, rogue employees created the problem. His behaviour revealed more about his leadership, corporate citizenship, and integrity than any speech.
A corporate culture reflects how people do things within an organisation. “How do you get something done?” is the question that reveals the culture. At Barclays, the way to get something done appears to act illegally so long as it protects the organisation. Even in his letter to Andrew Tyrie, the Chairman of the Treasury committee, Diamond is intent upon confusing the system. At one level, the crisis was simply about traders seeking to improve their own trading position. Yet, he claims this is a separate issue form the LIBOR manipulations which were only done to protect the Bank’s liquidity position. Yet the reality is that they are connected by the culture that Diamond and others created at the bank.
The question we are left with after these episode is this: “Why would you want to do business with them?”
- Bob Diamond forgoes bonus as Barclays fined for Libor manipulation (telegraph.co.uk)
- Eagle fried (economist.com)
- Can Bob Diamond hang on after Barclays Libor scandal? (guardian.co.uk)