If you search the internet for Bob Diamond, the chief executive of Britain's Barclays Bank who resigned on July 3 amid the latest financial scandal to roil markets across the world, the two adjectives that most often pop up are American and brash. It's easy to see why. Diamond, 60, is a hard-charging trader from Concord, Mass., who rose to the top at Barclays founded by Quakers in 1690 by building its investment-banking division into a global powerhouse and helping the bank grow to Europe's sixth largest, with assets of $2.3 trillion. Among his boldest coups was the purchase of the remains of Lehman Brothers within days of its bankruptcy in 2008.
That all makes for a simple, clichéd narrative: uncouth and ambitious foreigner arrives in London, makes buckets of money and lots of enemies before it all ends in tears. Diamond, who has earned more than $150 million at Barclays since 2005, didn't help his cause when, summoned before a parliamentary hearing on July 4, he insisted on addressing the members by their first names while MPs continued to address him, frostily, as Mr. Diamond.
Foreigners have indeed played key roles in some of the greatest financial disasters brewed in the U.K. capital. When JPMorgan Chase incurred a multibillion-dollar loss because of a derivatives trade gone awry, attention focused on Bruno Iksil, a Frenchman based in London, whose huge portfolio of deals had earned him the nickname the Whale. American Joe Cassano and the financial-products division of AIG that he headed whose catastrophic losses almost toppled the giant American insurance company at the height of the 2008 financial crisis also operated out of London. And it didn't take investigators poring over Lehman's books long to discover that, among other shenanigans, the London operation of the failed investment bank had attempted to disguise its death agony by shifting billions of dollars across the Atlantic.
But take a closer look. From the South Sea bubble in 1720 to the 1990s implosions of the Bank of Credit and Commerce International and of Barings Bank and through a gallery of rogue traders and dodgy deals that have posed existential threats to financial institutions on several continents during the past quarter of a century, the common factor is not that they were caused by foreigners in London. London itself, especially its compact financial district known as the City, is implicated.
The latest scandal the alleged rigging by institutional insiders of LIBOR, a key money-market rate that is used as a benchmark for an estimated $350 trillion in financial products and services, and at least as much again in financial-market transactions around the globe threatens to be the biggest, extending far beyond Barclays to banks in the U.S., Europe and Asia. It surfaced on June 26, when Barclays was fined $450 million by British and U.S. regulators for attempting to manipulate that rate for several years, starting in 2005. The case has sparked a parliamentary inquiry and a criminal probe by the U.K.'s Serious Fraud Office. Investigations of more than a dozen other banks continue in continental Europe and across the Atlantic, where the U.S. Commodity Futures Trading Commission (CFTC), helped by the Justice Department and the FBI, has played a key role in blowing the whistle and where armies of class-action lawyers are sharpening their pencils. "There is an industry-wide problem coming out now," Diamond told the parliamentary committee. No criminal charges have yet been filed in London or elsewhere, but it's already clear that this problem Congressman Barney Frank called it "outrageous," and Nation columnist Robert Scheer dubbed it "the crime of the century" affects far more than the industry that produced it. Just about anyone anywhere who has a credit card, mortgage or other form of loan was potentially impacted.
Individuals and institutions may end up on trial. Yet a swelling sentiment would like to see a bigger entity in the dock: London. It's no longer enough to explain the City's supremacy as a global incubator for scandals by citing its global supremacy as a center for international finance, the world's most potent competitor to New York City, a place where transactions covering literally trillions of dollars, pounds and euros are executed every day.
The scandal also lays bare serious failings in the British system failings of regulation and of culture. In a globalized financial system, such failings have global repercussions, yet responsibility for fixing the system rests locally, with the flawed system itself. Trust in public life is sliding everywhere, but British institutions are especially fragile, according to a report by Democratic Audit published in July that compared data across E.U. and OECD countries. Politicians, police, regulators, corporations and the media, which should hold the rest to account, have been enmeshed in a series of confidence-sapping scandals. "Who guards the guardians?" asked Justice Brian Leveson at the start, in November, of the independent inquiry into the phone-hacking scandal that came on the heels of revelations about British parliamentarians milking their expense accounts. As the LIBOR imbroglio unfolds, and the weaknesses at the heart of the British establishment create problems around the world, that question is gaining breadth and urgency.