Stefen Chow/Fortune Global Forum

World News


Faulting the Guardians: Failing Financial Regulators

Guardians can be such insipid creatures. Their skills often lie in excusing their indiscretions and ignorance rather than performing their true functions – guarding against set improprieties and wrongs. With the Barclays crisis over the Libor rate, financial regulators are being pushed into the limelight they would rather avoid. London and Washington are proving to be the sites of intense activity, with an interest being taken to pursue 10 big banking names including Citigroup, UBS, JP Morgan.

Where there is a smoking bank in violation, others are bound to be present. Financial conduct is, after all, a case of imitation and flattery – and the rule breakers are rewarded first.

On Monday, Congress requested information about the role of the Federal Reserve Bank of New York as the improprieties concerning the manipulation of interest rates have come to light.

The oversight panel of the House of Financial Services Committee, an occasionally inert body, has suddenly sprung into action, seeking the transcripts of various phone calls between 2007 and 2008 that took place between central bank officials and Barclays’ executives. What is rather damning about this kafuffle is that Barclays itself may have raised concerns with American and British authorities over the way Libor was set but was not told, according to Representative Randy Neugebauer, to desist in the practice.

It is remarkable that the practice of lowballing – the underreporting of Libor submissions to conceal the financial decay that was setting in – seemed to make no impression on the regulators at all. Neugebauer is doing his utmost best to take the high ground, a ground conspicuously absent in the sense of corporate morality. “The role of the government is to ensure that our capital markets are run with the highest standards of honesty, integrity, and transparency,” said Mr. Neugebauer.

Enter, then, the defense that the guardians were at fault. When theft is approved by the police, the thieves can hardly be held to account. That’s the argument in a nutshell – at least as, that being developed by Barclays. The BBC’s Robert Preston summed it up: “A central question, which MPs are likely to probe, is why Barclays’ managers came to believe, after the conversation between [former CEO] Mr. Diamond and [Bank of England’s] Mr. Tucker, that the Bank of England had sanctioned them to lie about what they were paying to borrow when providing data to the committees that set the Libor rate.”

Those devilishly cheeky banksters have a point. In recent times, the regulators have shown time and time again that they are asleep at the wheel and even, in some cases, sitting alongside the very financial institutions they should be watching. While it was reported that scores of federal regulators (the Federal Reserve Bank of New York and the Office of the Comptroller of Currency) had perched themselves inside JPMorgan Chase’s Manhattan headquarters, none played a role in disclosing the multibillion-dollar trading loss in May.

These embedded and evidently impressionable beings believed what was fed them – morsels of promise that JPMorgan was avoiding speculative pursuits. This might well have been down to the chief executive Jamie Dimon, who is said to have charmed the pants off them. “To me,” claimed professor of finance at Boston University Mark Williams, “it suggests that he is too close to his investors.” (Dimon, to further prove the case, is on the board of the New York Fed, bedding down.) The investment arm of the bank, in short, was given full swing – with the regulators’ blessings.

Where to then, with the guardians? Commissions will be formed documenting their laxity. Recommendations will be handed down suggesting improvements. But nothing will be done because the financial sector for years has had an unwritten agreement between speculators and regulators – the world of money should be fluid, anarchic and ultimately, unaccountable.