[P2P-F] Fw: [gang8] Report on Select Committee proceedings

Fri Jul 6 12:51:32 CEST 2012

----- Forwarded Message -----
From: Geoffrey Gardiner <geoffrey.gardiner at btinternet.com>
To: gang8 at yahoogroups.com 
Sent: Friday, 6 July 2012, 11:10
Subject: [gang8] Report on Select Committee proceedings

Select Committee session on 4th July 2012.

Report by G W Gardiner

I was able to watch almost all of the questioning of Bob Diamond by the 
Select Committee. I missed only ten minutes while I took a phone call from our 
local radio station which resulted in being interviewed myself the following 
morning.

Diamond showed self-control that was an example to all. Even when faced 
with the most vicious insults he did not for a moment come anywhere near losing 
his temper. The members of the committee had already in their minds convicted 
him of being the epitome of all that was wrong with modern banking, so he was on 
a very tough wicket. His tactic was to admit all the sins of the past and try to 
show he had dealt with them, which indeed he has. He told them he had ended 
‘proprietary trading’, i.e. gambling, and that decision returns investment 
banking to the boring, tame, safe affair it used to be. Although he did not say 
so, I believe he has ended all cross-selling in the retail banking, and the 
targeting which went with it and corrupted the morals of the staff. 
Interestingly that morning a friend told me about how his account (not at 
Barclays) was changed to a more expensive one as a result of a bonus-seeking 
clerk forging his signature on a form. 

After two and a half hours of getting nowhere in achieving his personal 
agenda an exasperated member of the committee likened Diamond to Geoffrey 
Boycott, a famous cricketer who was notorious for his ability to stone-wall for 
hours. The stone-walling in Diamond’s case was his refusal to name names or 
accuse the authorities of malpractice. Because he had lost his job, everyone 
thought he would be out for revenge, but he was not. He would not admit - what 
is obvious - that the conversation he had with the Deputy Governor of the Bank 
of England should be interpreted as a request to Barclays to fall into line with 
all the other banks and make a false submission of the Libor rate. He would not 
name the government official or officials who also lent on him. The official 
most likely to have done that was the one who was in charge of the banking 
crisis management, Shriti Vadera, Gordon Brown’s nitwit economic adviser. He 
referred to her as ‘Shriti’ as if she were a benign friend, but then he called 
all the members of the Committee by their first names as if they were all old 
friends.

Why did he not take his revenge as many expected? My first thought was that 
he was fearful of the B of E and the FSA taking their revenge in turn on 
Barclays, but then an even better reason for his action occurred to me and I 
used it in my broadcast. Diamond, by miles the most successful banker in the 
world at the moment, would already have in his pocket one or more offers from 
continental or American banks worth millions a year to become their CEO. If the 
prospective employers are operating in London, any appointment of Diamond 
requires permission; he has to show he is a ‘fit and proper person’ to the B of 
E and the FSA.

Diamond split the Libor manipulation into three eras, two of which are 
significant. There was the attempt by 14 traders in New York to influence the 
setting of the Dollar Libor. The official report suggests the change required 
appears to have been half a basic point. That is a two hundredth of one per 
cent. The report contains no proof that Libor was affected. Barclays’ submission 
to the committee of the British Bankers Association which sets the rate is only 
one of many. One would expect the rule ‘De minimis no curat lex’ to apply, but 
the charges were brought in New York where there is enormous resentment that 
Barclays has become the top dog, and it won the race to take over the rump of 
Lehmans at a bargain price. There has already been one unsuccessful attempt to 
get a court to overturn that deal. The rate difference at the time of the 
banking crisis was 36 basic points. Many have made the point that at that time 
there was really no Libor as no-one dared to lend to another bank. Anyway the 
setting of Libor is a theoretical exercise of a nature I have described 
elsewhere as ‘a knockabout’. The rate is nonsense as it is a sort of vague mean 
between many deals, each individually negotiated. I suggest Libor is no more 
than a figment of the imagination and it is crazy that it is used as a 
benchmark. One wonders if it matters what it is. The rate setters must be 
tempted to leave it the same and save themselves trouble.

The reason why it has become important is that there has been a cult of 
mucking around with interest rates for half a century, and lenders and borrowers 
have to assume that anything might happen to interest rates. They dare not use a 
fixed rate or they will go the way of the US Savings and Loans. So a benchmark 
rate has been needed. There is nothing official, like Bank Rate, so something 
had to be concocted and everyone turns a blind eye to the nearly nonsensical way 
it is arrived at and its unofficial nature even if it does receive the impress 
of the BBA.

Diamond has cleaned up investment banking and turned his attention to 
retail banking for which previously he had no responsibility at all. His policy 
has been to be first to admit there was wrongdoing (in retail and investment 
areas) and to settle fast, which has unfortunately led the public to assume 
Barclays is worse than the other banks, the opposite of the truth. The Committee 
never tried to ask him what was the reason for the frauds in retail banking. I 
hoped he might have been able to answer and would say what I would say, and 
indeed did in my broadcast. The money transfer business is costly, but when 
interest rates were high that cost was covered by the endowment effect of high 
interest rates on current account balances. In 1978 Barclays told me that they 
needed a base rate of 9 per cent to cover the costs. Hopefully computerisation 
has lowered those costs, but I doubt if it is much. When Bank Rate was 2 per 
cent in 1950, a customer of a bank was charged 6d for every entry on his/her 
account. Six old pence would be at least 300 today, that is £1.25 in present 
money. Given computerisation I doubt if that amount is needed. In my broadcast I 
said. ‘The first bank to introduce a charge of five pence an entry will soon be 
out of business. There needs to be an agreement between banks all to introduce 
charges at the same time. But such an agreement is illegal under competition 
law. The government must therefore step in and say to the banks, ‘You will all 
charge and here is the scale you will all apply.’ 

I explained how banks had filled the gap in their incomes by charging 
fiercely those who take unauthorised overdrafts and by overpriced payment 
protection insurance. I said, ‘Issuing a cheque which is not covered by one’s 
balance is theft, and the accounts of people who do it should be closed, but the 
banks do not close them down as they can make big money from them.’

We had some wonderful examples of politician-speak from the Committee, the 
superficially clever-clever points. One called Teresa won the prize for nonsense 
by saying she had done a word check on Barclays 283 page report and counted the 
number of times certain words were used, like ‘profit’, but she could not find 
the word ‘ethic’ used even once. If she had read the report and made sure she 
understood it she could have asked some really good questions. 

Just as Barclays suffers from anti-British sentiments in New York, the 
Committee seemed to me to be affected by anti-Americanism. So much for the 
‘Special Relationship’. Well the questioning did take place on 4th July.

In the whole three hours the only time they came near to getting Diamond 
rattled was on the subject of his own pay and bonuses. He made no attempt to 
justify them nor did he admit they were excessive; he just said that was a 
matter for the board of directors.

I have watched several broadcasts of Select Committee question sessions, 
and I have never seen one so bad. I would not say the members were without 
cleverness and knowledge (one at least was an investment banker), but compared 
with Jay’s questioning at the Leveson enquiry their efforts were pathetic.

But the really terrible ignorance has been shown in related interviews. 
Alistair Darling, former Chancellor of the Exchequer, last night complained that 
the Bank of England had given billions to the banks who ‘had not lent it on.’ 
The BBC then produced a graph comparing the huge growth of bank liquidity 
(balances at B of E) with the tiny growth in bank lending. In my broadcast I was 
again able to say that there is no connection between the two. ‘Every loan a 
bank makes is money it has created, and is its own debt. If the banks have 
£300billion on deposit at the Bank of England and they lend £300billion in new 
loans, they will still have £300billion on their accounts at the Bank.’

Richard must be furious at hearing this nonsense called Quantitative Easing 

I think I was very lucky that the interviewer allowed me to make such 
technical points. He merely used them as an opportunity to point out to the 
listeners how technical these matters were and I added that there were only a 
tiny number of people in the world who understood the money and banking system. 
I nearly added, ‘and those few who do are all friends of mine.’ !!! I did step 
out of line once. After making clear that ‘mucking around with interest rates’ 
had not been felt necessary in past ages, 1746 to 1826, 1932 to 1951, I referred 
to ‘an idiot called Milton Friedman who won the Nobel prize for economics’. 
Perhaps I should have used more parliamentary phraseology such as ‘unsound 
academic’. I described the setting of a 17 per cent Bank Rate by Howe in 1979 as 
‘monstrous’.

Afterwards I made a review in my mind of what Diamond has achieved. 
Barclays started a drive to get into investment banking back in the 1970s when I 
was myself in the thick of things in the City of London. They took over brokers 
and jobbers, and in particular De Zoote Wedd. The operation became ‘Barclays de 
Zoote Wedd’ or just ‘BZW’. The ethical divide proved to be massive, and what 
happened has been the subject of an account by an insider, Martin Van Der Weyer, 
in a book called ‘The Falling Eagle’. (Barclays logo is an eagle; enemies claim 
it is a vulture.) Diamond therefore succeeded where others had failed miserably. 
He raised staff numbers by about 40,000 worldwide. Barclays moved up from around 
a high double digit position in the world league to number one.

I get the firm impression that Diamond more than anyone else understands 
what went wrong and wants to put it right. Whether he has the technical 
understanding to be Governor of the Bank of England I cannot tell, but he could 
be the best choice, though the job is well below his pay level.

I gave my interviewer a copy of TTM. If he reads no more than the blurb on 
the cover, written by Chris M, I shall be content.

Geoffrey

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