Wow, this resignation took place a mere day before the Treasury select committee hearings on Wednesday. The Wall Street Journal bizarrely sent a news alert out announcing the resignation, yet it links to a front page story that is out of date, saying that Diamond “resisted pressure to resign” and has “no plans to leave. FT Alphaville, natch, already has the resignation announcement from the board posted, which clearly shows that Diamond has resigned with “immediate effect” and that the departing chairman, Marcus Aigus, will lead the search for his replacement.
This sudden announcement also makes it seem much more likely that serious shoes will drop at the Wednesday hearings.
Although this news has just broken, and I’m sure there will be a ton more commentary in the next few hours, I suspect the proximate cause is that Diamond’s attempts to defend the rigging of Libor during the crisis as being tacitly approved by the Bank of England was not going to fly.
This is what Diamond claimed, in a letter submitted in advance of the Treasury select committee hearing (boldface ours):
The second issue relates to decisions taken in relation to the LIBOR setting process during the credit crisis. The authorities found that Barclays reduced its LIBOR submissions to protect the reputation of the bank from negative speculation during periods of acute market stress. The unwarranted speculation regarding Barclays liquidity was as a result of its LIBOR submissions being high relative to those of other banks. At the time, Barclays opinion was that those other banks’ submissions were too low given market circumstances.
To be clear, Barclays encountered no liquidity problems through 2007 and 2008. The inaccurate speculation about potential liquidity problems in the two periods noted created a real and material risk that the bank and its shareholders would suffer damage. It was, as you will recall, a period of extraordinary turbulence and uncertainty. This raised questions for the bank about the integrity of the LIBOR setting process, and various individuals within Barclays raised issues externally about that, including with the British Bankers’ Association, Financial Services Authority, Bank of England and US Federal Reserve.
Even taking account of the abnormal market conditions at the height of the financial crisis, and that the motivation was to protect the bank, not to influence the ultimate rate, I accept that the decision to lower submissions was wrong.
In other words, Diamond was saying “you can’t really blame us for this, we told everyone and no one said no.” We’ll find out soon enough, but the effort to shift blame to the regulators may be what sunk him. Paul Tucker, the deputy governor to the Bank of England to whom Diamond spoke directly on October 28, 2012, has had subordiantes issue denials of Diamond’s account. Paul Mason of the BBC reported a few hours ago that the FSA effectively called Diamond a liar (emphasis ours):
As Barclays struggled to avoid being forced to take bailout money from the UK government, on 29 October 2008: “A senior Bank of England official contacted a senior Barclays manager… As the substance of the conversation was passed to other Barclays employees, certain Barclays managers formed the understanding that they had been instructed by the Bank of England to lower Barclays’ Libor submissions, and instructed the Barclays Dollar and Sterling Libor submitters to do so – even though that was not the understanding of the senior Barclays individual who had the call with the Bank of England official.”
These senior people have now been named by the BBC’s business editor Robert Peston: Paul Tucker at the Bank of England, and Bob Diamond at Barclays.
Thus, the official picture drawn by the FSA is that the Bank of England did not instruct Barclays to fiddle the rate, and that Bob Diamond “did not understand” that he had been so instructed.
The other interesting side effect is that this development, that of two heads falling in short succession at the top of one of the UK’s biggest banks, the only major institution not to receive any bailout funds, will raise the visibility of the Libor scandal in the US considerably. One correspondent has said the price manipulation goes back to 2001, and if that proves to be true, this is an even bigger cesspool that the reports so far envision. And the fact that top executives have been forced to resign from a bank that cooperated in the investigations and the settlement documents said deserved to be treated with leniency as a result, raises the question of what sort of sanctions should be meted on the executives of less cooperative and presumably equally culpable institutions.
Update: Apparently the US financial press has started circling the wagons. Although Bloomberg’s editorial yesterday took a firmly critical stance on the Libor scandal, furzy mouse report that the Bloomberg talking heads today are taking the line this was a minor infraction. Ahem. Bid rigging and price fixing are criminal. As Upton Sinclair said, ‘It is difficult to get a man to understand something when his salary depends on his not understanding it.’
Update 4:15 AM: Aha, I was not quite on target as to the reason for the Diamond resignation. He threatened to open war on the Bank of England at the Treasury select hearings. Per FT Alphaville (hat tip bob, emphasis original):
Without doubt, this was the trigger:
Bob Diamond is threatening to reveal potentially embarrassing details about Barclays’ dealings with regulators if he comes under fire at a parliamentary hearing on Wednesday over the Libor rate-setting scandal, according to people close to the bank’s chief executive.
“If he is attacked, he will fight back,” said one person familiar with preparations for the Treasury select committee hearing. Such a confrontational tactic could aggravate the fraught relations between the bank and the authorities after Barclays paid £290m to settle an investigation by UK and US regulators over the bank’s involvement in manipulating key interbank lending rates.
There were already overt threats to drag Paul Tucker, a leading contender to take over from Sir Mervyn King as BoE governor, in to the mire by suggesting that his unit somehow condoned fantasy Libor quotations.
But that’s not the point. You just don’t threaten the Bank. The City of London is not some sort of financial democracy. It is a hierarchy. It is not Capitol Hill; political brawling is prohibited.
We have not had a confrontation reach that level in the US, but this attitude seems to be remarkably wanting here.