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Saturday, July 21, 2012
Banking’s reputation was already on the floor when along came rate-fixing and money laundering for drug cartels and rogue states to completely destroy the public’s trust, writes Kyran Fitzgerald
If you thought the reputation of global banking couldn’t sink much further, think again.
Since the subprime lending crisis broke in the US, five years ago, the financial sector has been in a near permanent state of crisis.
In the past couple of weeks, new revelations have rocked the reputation of an industry which will have to be rebuilt from the bottom up.
Several banks have been implicated in a scandal involving the setting of interbank rates which could yet cost the industry countless billions in compensation payouts to customers.
And to put the tin hat on it, HSBC — a global bank which survived the financial meltdown, largely intact — has been caught up in a huge scandal involving the laundering of billions of euro for Mexican drug barons. It has also emerged the bank was involved with the Iranian government and some extremely dodgy Saudi financiers.
You couldn’t make it up.
Already, the Bank of England governor, Mervyn King, has stepped in to engineer the departure of the CEO of Barclays Bank, Bob Diamond after the bank admitted to its role in the rigging of the benchmark London interbank interest rate known as Libor.
It has since emerged that traders in several banks have been involved in the manipulation of interest rates. In the case of Barclays, its traders submitted false figures in an effort to paint a flattering picture of its market position at the peak of the banking crisis in 2008.
The affair has led many to question the quality of regulation in the City of London and it now looks likely that the next governor of the Bank of England will be drawn from outside the Bank or the banking community, as the world’s largest centre of finance sets out to rebuild its reputation.
Europeans may draw some pleasure from the embarrassment of London’s financiers, many of whom have been busily talking down the likely prospects for survival of the euro.
However, the rate-fixing scandal has also spread to encompass Euribor, the eurozone rate-setting mechanism.
Traders from US banks, Citigroup, and JP Morgan, Deutsche Bank, Societie General and Credit Agricole, were engaged in the same game, it’s being alleged.
Barclays has already paid a fine of over €300m to the regulators, but this is only the start. Many bankers will now be watching the post nervously. The City of Baltimore has already commenced legal proceedings over the impact of Libor fixing on the cost of interest rate swaps it took out as a hedge on the cost of loans.
It has joined forces with other plaintiffs, pension funds, fund managers and municipalities.
It is being suggested that interest rate manipulation may have pushed up the cost of mortgage repayments, adding billions to the bill of US householders.
The whole affair is causing great embarrassment to regulatory authorities. The US Fed chairman, Ben Bernanke and the US treasury secretary, Tim Geithner have been summoned before Congress to explain the lack of supervision on their watch.
But Geithner’s problems may not end there. Many believe the Libor scandal is being put in the shade by the revelations concerning HSBC and the facilitation of drug-money laundering.
The US Senate Banking Committee has been holding hearings into the activities of HSBC which it has accused of acting as an illicit funding channel for a mix of drug kingpins and rogue nations (such as Iran) .
The bank operated a federal structure which meant its Mexican operation was run largely independent of central control with serious consequences for the bank.
It is now being suggested HSBC laundered billions of dollars for the cartels.
Last Monday, the Senate Banking committee issued a damning report detailing the collapse in HSBC’s compliance standards.
Two names of Irish interest were mentioned in the report, the current AIB chairman, David Hodgkinson and Michael Geoghegan, the former HSBC CEO, now a senior adviser to Nama — Finance Minister Michael Noonan has said the two men retain his full confidence.
It also emerged that the rogue trader known as "the Whale" may have cost JP Morgan almost $6bn, twice previous estimates.
The events have given new impetus to efforts to rein in the sector, worldwide. The implications of all of this for Ireland is unclear. Certainly, IFSC companies may be scrutinised even more closely.
Main men in controversies
* (1) Mervyn King: Long-serving Bank of England governor.
Has warned of gloomy economic times ahead. Is pressing ahead with policy of quantitative easing.
Has been an outspoken critic of the banks over the manipulation of the London Interbank interest rate, LIBOR.
* (2) Lord Green: Stood down as chairman of HSBC to join the Cameron-led government in charge of trade promotion.
He presided over HSBC alongside Dublin-educated Michael Geoghegan, and is regarded as a softly spoken, cerebral type.
* (3) Michael Geoghegan: He turned down an offer of a place from University College Dublin to join Hongkong & Shanghai Bank after his mother showed him a job ad.
Geoghegan spent 37 years at the bank, four of them as chief executive, before stepping down in 2010. He built a reputation as a straight talker.
He is currently chair of the Nama Advisory Group.
* (4) David Hodgkinson: Executive chairman at AIB since the departure of Colm Doherty late in 2010. He earned some brownie points when he proposed a debt forgiveness scheme for struggling mortgage borrowers.
He has stepped back from his executive role following the appointment of David Duffy as chief executive.
Hodgkinson joined HSBC in 1969 rising to become group chief operating officer between May 2006 and December 2008.
* (5) John Varley: Boss of Barclays up until 2010 when he was succeeded by the more abrasive Bob Diamond. Varley was viewed as having steered the bank through the dangerous waters of 2007 and 2008, but his record is clouded by email evidence of bank traders cooking the interest rate books and glorying in it.
* (6) Carl Levin: Wily Democrat veteran committee chair who will milk the money-laundering scandal for all its worth, perhaps setting the stage for a tougher approach to Wall Street from a new Obama adminstration.
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