British Parliament grills Barclays ex-CEO Diamond

(MoneyWatch) LONDON -- A day after stepping down as CEO of Barclays bank, Bob Diamond was contrite, but deflected blame as he was grilled by the British Parliament over the growing rate-fixing scandal. Facing parliament's Treasury Select Committee, the U.S.-born Diamond look tired and drawn, a far fry from the flashy style that has often rubbed British analysts the wrong way -- and which is invariably described as "American."

Barclays was fined $453 million last week by U.S. and British regulators for submitting false reports on interbank borrowing rates between 2005 and 2009. Much of that activity originated from traders in Barclays Capital, the division which Diamond headed at the time.

Led by interrogator Chair Andrew Tyrie, much of the hearing focused on recently released notes of a conversation between Diamond and Paul Tucker, a deputy governor of the Bank of England. The notes -- which are open to interpretation -- have been read by many as an implied encouragement of Barclays by the Bank to 'adjust' LIBOR, the daily inter-bank lending rate. "It did not always need to be the case that we appeared as high as we have recently," according to the notes.

Barclays boss resigns over rate-fixing scandal
What is the LIBOR, and why you should care

At the time, as the financial crisis was putting immense pressure on the banking industry, most UK banks had had to be bailed out, nationalized or given secret loans. Banks in Germany were struggling and many other banks were posting lower interest rates than Barclays, which was on the cusp of closing private funding in the Middle East. A higher interest rate indicated that Barclays was in more trouble than the other, obviously shaky banks.

What's unclear is whether the Bank of England was encouraging market manipulation to make Barclays look better and whether the government did likewise. Also unclear is whether Diamond's deputy, Jerry del Messier, was alone in misconstruing the note as an instruction. Who understood what, and when, and why remains a matter of interpretation. Diamond was unclear whether a Labor minister, Shriti Vadera, had been involved in discussions about LIBOR and one of the key hanging questions in this affair remains how far the regulators were implicated and how far the government too was involved.

Tyrie is known to be an astute and fierce investigator of financial services and he was clearly in no mood to give Diamond an easy ride. The UK public is outraged. Almost all UK banks remain fragile and it has been estimated that the bank bailout has cost every taxpayer some $35,000 each -- more than the lifesavings of many British citizens. The economy is in the doldrums, unemployment is high, the summer weather has been the worst on record and even the prospect of the Olympics has done little to lift British spirits. In other words, July 4th was not a great day to be a flashy American banker in the hot seat.

That Diamond, a poster child for extravagant CEO pay, should have been in charge of a bank that has now been excoriated by UK and US regulators alike has enflamed British opinion that is already frustrated by the lack of structural reform. All UK retail banks are currently led by CEOs from investment banking and that fact alone has provoked frustration and cynicism from a populace that has seen nothing that looks like change.

"Why," Tyrie asked, "were you unaware" of what was happening with LIBOR. "What was wrong with Barclays that it was not reported up?"

"Why on earth did you not know that this was going on on your watch? David Ruffley MP asked.

"The reports that came to me daily were the rates of LIBOR, not the relative ratings,"Diamond replied.

"You've had quite a lot to say about the role of banking of society. Should it include a more punitive regime so that wrongdoers either acting recklessly or to mislead markets should lead to customdial services?

"When I got the results of this investigation," Diamond insisted, "when I read the emails from those traders, I got physically ill. If you are asking me should those actions be dealt with -- my answer is 'absolutely'....I'm sorry, I'm disappointed and I'm also angry. It was wrong and I'm not happy about it. But this doesn't represent the Barclays that I know and I love." He was keen to stress that the traders responsible were benefiting themselves, not the bank.

Traders are reported as saying that they'd post a particular rate and ask if anyone had a problem with it. "What kind of firm were you running," asked Labor MP, George Mudie. "that the staff didn't have the confidence to come and tell the boss that some people were getting up to activities that could destroy the bank?" He continued to ask what senior management was up to. How could it be that no one told Diamond anything?

"At the time, I wasn't the Chief Executive," Diamond replied.

"What kind of organization were you running?...Your senior management were either too frightened or too disinterested to come out about it."

Diamond repeatedly insisted that, as soon as he knew about the rate manipulation, he intervened. "The fact that the supervisor didn't raise it was wrong," Diamond conceded.

"Do you live in a parallel universe?" challenged Conservative MP Diana Leadsome.

Diamond was insistent that the problem derived from just 14 traders. Over and over again, he repeated that what they did was wrong, that he was angry about it, that it all should have been different. Fiercely contrite, he nevertheless couldn't provide a very coherent explanation of events apart from blaming subordinates: "They were not doing their job." He did not take on board the issue that a culture of silence might be his responsibility.

He was, however, quick to point out that this was an industry-wide problem -- a hint perhaps of the other banks that may be brought into this scandal. Word in the City suggest that most "too big to fail" banks may be involved.

Hovering over the hearing was the uncomfortable fact that, should a bank be accused of fraud or other criminal behavior, it must cease trading. No one wants to go there.

  • Margaret Heffernan On Twitter»

    Margaret Heffernan has been CEO of five businesses in the United States and United Kingdom. A speaker and writer, her most recent book Willful Blindness was shortlisted for the Financial Times Best Business Book 2011. Visit her on www.MHeffernan.com.

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