HOW THE LIBOR RATE FIXERS CAN HELP THE BIG SOCIETY

Bob Diamond - Gone but not forgotten?

What do we do when others are not looking? Do we please others or please ourselves? These issues are at the root of the LIBOR rate fixing scandal. Traders whose remuneration is largely based on profitable market performance are in a quandary when the market does not move in the way they would desire to maximise returns for their firm and themselves.The pressures to maintain high returns are immense both for their company's reputation and their own. Private benefit takes a front seat in these assessments and the benefit of society as a whole takes a back seat. As long as the bonus pool does not diminish in value then surely that is okay?

There appear to have been 2 types of collusion. The first type was as described above and was based on boosting traders' profits (greed?). The second type of rigging started with the onset of the credit crunch in 2007. Here the LIBOR rate was set artificially lower than it should have been, Possibly to help stimulate the economy? Bob Diamond in his evidence to the parliamentary committee alluded to having had conversations with the Bank of England about this very way forward. George Osborne was not slow to blame the then Labour Government for having its fingers in a manipulative process of LIBOR for economic ends.Is there such an approach as a moral rigging of the interest rate? It will be difficult to argue that this was done for personal gain although it definitely did distort the market rate of interest. Class actions will be more difficult to fight on this issue because bad things were being done to do good? Although if you are a pensioner on a fixed income and the interest rate on your life savings had been kept lower than it should have been you may be looking for a pay back.

If one believes in the free market philosophy of economics then the intentional distortion of the  competitive market by individuals and\or governments should be avoided or at the very least minimised. Intervention with a moral purpose to improve markets for the benefit of society (as described above) can be argued for -- though some economists would even disagree with that option. Intervention to rig a particular market to benefit a particular grouping and no-one else in society is a different matter altogether. Most economists would disagree with this latter action because it would have such potentially harmful effects on the  performance of the economy with consequential negative effects on the majority of people and other economic agents like firms.

Who are the best people to try and get to the truth of what happened? -- Is it a parliamentary committee? The MP's are well meaning enough but their questioning of key people appearing before them is often un-co-ordinated and unfocused. Shall we therefore have a public enquiry in front of a judge? The standard of forensic questioning will be higher --people will be caught out -- but the prospect of any prosecutions is minimal and there will be a list of recommendations which at best will only be partially followed through - ~One thing is for sure -- the lawyers will be much richer than they were before. The public purse will be greatly the poorer and the level of satisfaction in society at the outcome will not be significantly improved, if at all.

What about the police investigating something which is clearly a fraud? -- Possible criminal proceedings could send some wrongdoers to jail? Is that really likely though? Probably not. If this were America, a civil class action might be taken against Barclay's -- this could have greater prospects of success over the pond than in the UK. The Americans take this sort of thing much more seriously than we do. In the UK, any plaintiffs would need to demonstrate they had suffered losses as a direct result of these interest rate manipulations. Perhaps a class action might happen in the UK but frankly I doubt it.

We will just probably wring our hands in despair and then the fuss will die down?

More regulation will not work unless hearts and minds in the City are changed as well  -- This will be a difficult task but it is worth a try. LIBOR is used to set the price of trillions of dollars worth of financial instruments worldwide. It now needs to be estimated by an independent body and not the British Bankers association. Any finance staff who admit to and\or are found guilty of dishonest\illegal practises in the City, should have a share of their bonus pools donated to charity. The worse the misdemeanour, the higher the charitable donation.

This would be a great way of the City, helping the Big Society and would be far more popular than just taxing bankers and other finance staff more, to punish them for their peccadilloes. It could be deomonstrated that these bonus shares would be going to the part of society that would need them the most. Now that would be really radical!!!