LIBOR: City absolutism and raison de marché

by | 19 Jul 2012

What’s the difference between Monaco and the City of London?  One is a micro-territory governed by absolute fiat, hollowed out by property speculation, gambling, and the concealment of great crimes of wealth, and the other is Monaco.

In case your wondering, Monaco does have branches of HSBC and Barclays, and, if you need anything tricky sorting out, a quick phonecall to the Princely Palace will work wonders.  I understand Son Altesse‘s deputees can be “real bricks” when it comes to providing support.

The place is also quite full of British ex-pats.  The French don’t benefit from Monagasque tax breaks ever since the Elysée threatened to cut off Monaco’s water, though it is quite evident that the grand families continue to hide portable wealth such as paintings there.  Anyway, it is home from home for many people who have made a mint in the City.

There is a lot of talk about the current banking “corruption” scandals being “the tip of the iceberg”.  Didn’t James Cook almost discover the fabled Terra Australis when he crossed the Antarctic Circle, only to turn back 121km from the new continent in the face of increasing pack ice?  The whole iceberg analogy still implies some rogue break away element, however massive.  We need to be asking where these things come from; how they are formed?  The tip of the iceberg is a symptom of a bigger symptom of a massive problem.

Mervyn King appears to be hoping we do not.  He has certainly generated a degree of tactical confusion amongst critics of finance.  By heaping all the blame on Barclay’s (+ every other bank that gets its collar felt by the US Securities Exchange Commission (“SEC”)) he hopes to push the classic bad apple defence to the limit, trusting we don’t notice that the barrel is rotten too.  Some are saying that critical attention should be reserved for the banks, and nothing should be done to undermine the authorities in any manner which could prejudice further banking regulation.  Mr. King is playing on this too – part of the functionalist master plan to have all regulatory power reinvested in the Bank of England (“BoE”).

But, while noting the LIBOR rates were being manipulated more generally, let us briefly examine what apparently occurred during October 2008 in the depths of the Crunch.  The basic BoE line is that naughty banks, used to mucking around with LIBOR quotations, couldn’t resist manipulating their quotations to send signals of their strong credit-worthiness, and they got away with it because the British Banking Association was not equipped to notice, and the proper regulator, the FSA, was too useless to notice.  This apparently justifies “all power to the Bank of England” – it would never have happened on Merv’s watch.


Not only would it have happened had the BoE been the proper regulator, but the emails released across the last two weeks show that the BoE was acting as a de facto regulator and marching all over the FSA’s jurisdiction dropping hints and giving nudges interpretable by some so that what Barclay’s’ et al. should be doing is trying not to stand out like a sore thumb by quoting LIBOR too high.

The FT’s Alphaville blog called it exactly right the other week: the City is an absolutist monarchy, in the court of the monarch a courtier never blames any wrongdoing on the monarch, no matter how direct and unequivocal the sovereign’s command.  Bob Diamond’s mistake, the parvenu, was to dare to suggest that he was only relaying King’s orders.   Hence with a swift nod he was dispatched to the metaphorical Tower.  Dulce et decorum est etc.

A deeper aspect to this affair however is the competing roles of the BoE and FSA already alluded too.  Roughly speaking, we have an inconsistency that arose between two functions: namely the BoE’s aim in this regard, which was market stability, and the FSA’s role in preventing market abuse.

Evidently, the FSA should have been hot on the LIBOR manipulation, though for reasons we won’t go into here, the bizarre construction of the Financial Services and Markets Act and the panacea of Principles Based Regulation, gave many reasons for them to have not focussed their attention on money market rates.  Eventually, however, once the SEC got involved, they did belatedly pay attention.  That’s the problem – the FSA were also parvenus who suddenly started asking questions where the BoE would have preferred all facts to be eclipsed by cigar smoke.  For the BoE, despite claiming it was not the proper regulator, had been intervening in this area as part of its function of ensuring market stability.  Finance operatives knew this in 2008 – banks quoting LIBOR too high were obviously being regarded by market participants as about to go the way of Lehman Bros.  If banks kept doing this the whole financial market edifice was going to collapse.  This was a state of emergency which required special measures.  Special measures have been very common recently, justifying the imposition of technocratic governments, breaches of EU treaties, bank bailouts and so forth.  At the time it would have been surprising if sweating BoE officials had not been bending the rules and if necessary helping to rig the market to save it from itself.

And this is a significant reason, I believe, why the BoE wants the FSA shut down and regulatory powers returned to it so tghat it can properly suspend normal market regulation when it feels this is appropriate without having to answer hard questions later.  To put this in the jurisprudential language of Scotism, the BoE wants not only to exercise ordered power, but also the absolute power to intervene in the order it has created – the so-called potentia absoluta Dei which was subsequently extended to absolutist monarchs.  Mark well those who see benefits in so combining these two aspects in one office: the BoE is not seeking to regulate an order with suspensive powers which themselves are regulated i.e. it may break its own rules in clearly defined circumstances.  It doesn’t want clearly defined circumstances; it wants the power to act as it deems fit (a twisting of the Stoic theory of officium which Agamben shows Cicero began [cf. Opus Dei]).

Yet we must pass even one stage further.  To regard the BoE as another possible regulator is to misrecognise that one has already shifted further marketwards on the spectrum criminal law/self-regulation.  Yes we can regard the criminal law as itself an expression of capitalist interests, but it is nevertheless pertinent to make a distinction, emphasised in this case, between an order once constituted and the residual power to break or change that order.  Traders are still occasionally penalised for insider trading.  In this case the absolute power to change the order operates on the side of enforcement, so that the order is de facto changed in its non-implementation.  But here we are talking about explicit alteration of the order, something the BoE is all about.

The clue, as the Americans say, is in the name: “Bank” of England.  It is not a regulator, it is a bank, and the only difference between it and, say, the Bank of Scotland, is that the BoE has cornered the market in market-making.  This monopoly (for the City), which amounts in the ability to say who can come into the market, engenders all the other oversight powers, for as we saw with Bob Diamond, failure to comply with the sovereign will is met with an order of persona non grata.  In other words, no one will will trade with him anymore.  This is actually the etymological basis of “bankruptcy”.  The original userers OF London, the Jews and Lombards, set up benches (banques) in streets which took their names (Old Jewry, Lombard Street) on which they arrayed their coin and ran lending books.  If a lender failed to meet a debt, the other lenders would march to his banque and break it (rupture), or bankrupt him.

These days it is principally the BoE which decides who is allowed to lend in the City, but there is no neat line between its views on the matter and the views of the other market participants.  The Diamond, Le Missier, Tucker emails show just how much the constant chat continues about market operations, operations which the BoE is itself engaged in (it makes a tidy profit from being the other banks’ bank).  This “revolving door” modus operandi, inadvertently resting on another Scotist jurisprudential concept – the formal primes inter pares – completely dissolves whatever residual distinction there could be made between regulation and self-regulation.  It is no wonder the BBA were nowhere to be seen when the BoE could be relied upon to pick up the phone.

So what we have is soft absolute power – the ability to cause people to volunteer to bend to one’s will.  While there is as yet no damning proof that the BoE instructed Barclay’s and others to misrepresent quotations for LIBOR, there is evidence that the New York Federal Reserve informed the BoE in June 2008 (4 months earlier) of their suspicions that LIBOR was open to fraud and needed reforming, evidence that BoE officials were involved in discussions about LIBOR matters with the banks, and the lack of any evidence that the BoE did anything to investigate US concerns further.  The cry “we are not the regulator” just looks pathetic when the BoE’s hands were already dirty and it moved so swiftly to clawback its ancient powers from the FSA.  At the very least we are left with a question about whether we should allow one institution to exercise such absolute, arbitrary power without any checks or balances whatsoever.  Especially when that same institution so explicitly prioritises the interests of capital and denies the interests of the people (i.e. “we’re not the appropriate regulator”).

And indeed, that is a question for every other organisation in the City, from the Corporation of the City of London down.

Unless of course the SEC have taken it upon themselves to pay down the massive US federal debt with the proceeds of fines levied against City-based banks, in which case there may be not much of a City left, because as we said the LIBOR fixing, along with the payment protection and hedging mis-selling, and the HSBC money laundering, don’t even begin to scratch the surface of what has been going on.

Just ask yourselves this question: if the BoE allowed a cultural assumption to settle that in the Crunch it was not only ok, but positively justified par raison de marché, to commit criminal offences to shore up balance sheets, what else did the banks do in order to survive?  I shan’t be waiting on Mervyn King to break the news.




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