As news continues to unfold regarding the scale and depth of the LIBOR manipulation scandal, politicians are starting to hunt for scalps. The now-former CEO of British bank Barclays (NYSE:BCS) has chosen to cooperate, as Bob Diamond has resigned his position. It remains to see just how far this scandal will reach, and whether or not Diamond will be the only major CEO to lose his job over bad behavior that is increasingly looking like an industry phenomenon.
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Barclays - First to Fess up, First to Pay
Given the allegations that Barclays discussed and coordinated artificially low estimates of its borrowing costs with other banks, it seems highly improbable that it will be the only bank found to have committed wrong-doing. Nevertheless, Barclays is the first to publicly acknowledge its role and attempt to make amends.
Barclays has already reached a settlement with the United Kingdom's financial services authority and the United States' Commodity Futures Trading Commission and Department of Justice. For its role in manipulating LIBOR and EURIBOR from late 2007 through mid-2009, Barclays has agreed to pay $453 million, but additional civil penalties could ultimately come into play given the enormous influence of LIBOR in setting borrowing and lending costs throughout economies in Europe and North America.
But this does not end with fines and confessions. Politicians and the constituents they represent have clearly grown tired of bankers behaving badly, and they are now demanding more. As a result of its acknowledged role, the Chairman of Barclays, Marcus Agius, has resigned, as has CEO Bob Diamond and COO Jerry del Missier.
SEE: An Introduction To LIBOR
Did Diamond Need to go?
The loss of Diamond will hurt Barclays. Since becoming the CEO in 2011, Diamond has been credited with steering it through the difficult ongoing mess in Europe, as well as rebuilding the bank in the wake of the credit crisis of 2007 - 2009.
At this point, it is not completely clear what role Diamond played in the manipulation. While Diamond was not in charge of the bank at that time, he was in charge of Barclays' investment bank and it was here where much of the bid-rigging took place. It is almost certain that there will be further inquiries along the lines of "what did you know ... and when did you know it?" and public hearings in the U.K. look like a near-certainty.
These hearings ought to make for good watching. The nature of the LIBOR system is such that no one bank could hope to manipulate rates. What's more, almost every bank had the same incentive to make its balance sheet look better during that period.
That means that a host of banks, including Royal Bank of Scotland (NYSE:RBS), HSBC (NYSE:HBC), UBS (NYSE:UBS), Deutsche Bank (NYSE:DB), Lloyds (NYSE:LYG), Bank of America (NYSE:BAC), Citigroup (NYSE:C) and Credit Suisse (NYSE:CS) are going to come under scrutiny and it seems like a certainty that at least one of these was involved alongside Barclays.
But it may get even better than that. Apparently authorities, including the Bank of England (BoE), were aware of the manipulation while it was going on. There is certainly room to speculate as to why the BoE may have been willing to go along; propping up bank balance sheets would have served the BoE's interests at the time, and that was certainly not a good time for another scandal. With Diamond now no longer employed by a bank, he just may be willing to pull the curtain back not only on how widespread the behavior was, but how many people knew about it.
SEE: Banks Think It's Better To Take And Receive
The Bottom Line
Regulators have already praised Barclays' cooperation in the investigation of the LIBOR manipulation, and this may be a case of where the first to confess faces marginally less severe consequences. It will be especially interesting to see if other CEOs are called to resign in the wake of this scandal. The loss of Diamond's leadership at Barclays is unfortunate, but there are several executives in the industry who should be able to step into the role and lead the bank effectively. As such, and given Barclays' current valuation, the further risks to the stock don't seem that large.
Looking more broadly, this is just another scandal for an industry that just cannot seem to get its nose clean. There have been similar scandals before in markets like government bonds and the participants survived; the knowledge of regulators in this case may well serve to limit the financial sanctions that are ultimately levied. Nevertheless, it is increasingly clear that there is no such thing as a "safe" stock in a global banking industry that very nearly seems to require excessive risk-taking and/or ethical shortcuts to stay competitive.
At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.
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