Fixing The System Bankers

There has never been a corporate bloodbath like it.

On July the 2nd, 2012, the man who had just

resigned as Chairman of Barclays was summoned to the Bank of England.

They made him an offer he couldn't refuse.

It was made very clear to us that the governor who had

spoken to the chairman of the FSA and indeed had spoken to the

Chancellor of the Exchequer was delivering us a message that the

regulatory authorities no longer had confidence in our chief executive.

The establishment had had enough.

In the firing line was Bob Diamond -

the most successful banker in Britain.

Now, they wanted his scalp.

A major cultural change was required at Barclays.

It's a story that would have been inconceivable

in the golden years before the crash.

Bob Diamond, the president of Barclays, who's a Chelsea fan...

Then, Bob Diamond was a star player on the national stage -

the epitome of all that's celebrated about our banks.

He was like Herbert Von Karajan at his very best

and they all sang and they all danced to his tune.

Once he was the figurehead who pledged after the crash

to redeem the tarnished reputation of a broken industry.

Today he's the symbol of all that's reviled about banking.

The public can't really trust the banks on anything.

They couldn't trust the banks to be essentially safe and secure

and not collapse, they couldn't trust the banks to be honest

when they sold products to them and so there is a real sense

that, on almost every front, banks simply can't be trusted.

Five years on, the economy is still on its knees...

..and the reputation of our banks has been shredded by failure

and scandal after scandal.

So this series asks what do we want from our bankers?

And can we ever trust them again?

The City of London is another country.

They do things differently here.

The Lord Mayor's Parade has progressed through the City

almost every year since 1215.

On the surface it may seem

that little has altered down the centuries

but beneath the pomp and pageantry, for the last five years

this has been a city beleaguered by crisis and controversy.

So now the City's leaders are having to justify the role it plays

more than ever.

The City contributes some £63 billion of revenue for the Exchequer.

That's something like 12% of the total,

so £12 in every 100 that comes into the Exchequer's coffers

is produced by financial and professional services.

And that sums up the paradox about this place.

We need its money but despair at the behaviour.

Of course, there's more to the City - law, insurance

and shipping are also here - but it's the banks that are under siege.

And it's the bankers who've been blamed for plunging

the country into debt and austerity.

'Banking bail-out.

'The government pours in £37 billion

'to take huge stakes in three British banks.'

'..and the taxpayer foots the massive bill.'

After the crash of 2008, we spent £132 billion to bail the banks out.

That's a third more than we spend a year on the NHS.

Five years on, we still own huge chunks of Lloyds TSB

and the RBS Group.

So with public money propping up the system,

people are in no mood to forgive and forget.

They don't like the fact that the banks let them down,

they don't like the fact that they had to bail them out

and you put that on top of all the other day-to-day issues,

you know, service is not very good and value is often disappointing and

so on, and this is an industry that needs a lot of fixing,

a lot of repairing in its relationship with its core customer base.

We're left with tough choices.

We want the City to be prudent and cautious, looking after our savings,

but we need it to take risks and generate wealth for us all.

Right now in some ways you have the worst of both worlds in the UK

in that you have a public that doesn't like the idea of banks

making money and, frankly, you have many politicians who

don't like the idea of banks making money either.

They're asking a completely impossible task for the banks -

ie, to become profitable enterprises that don't need government support -

and yet at the same time they're reacting with horror

when the banks actually try to do that.

Banks are different to commercial enterprises in other industries.

We sit right at the heart of the economies where we do business.

You can't have vibrant economies without a vibrant banking system

and without vibrant economies

you can't have stable and vibrant societies.

Banks are different

and that was the rationale for stepping in to rescue them.

But now, with a new crisis of entirely their own making,

banks' special status - some say special pleading - seems harder to stomach.

There's no question that society now expects a much higher

standard of behaviour and much higher

standard of service of customers than, frankly, was the case in the

period running up to the crisis and the early years of the crisis,

and I think that banks just have to accept that.

We also need, clearly, a change of values in the financial sector.

Greed cannot be dominating everything

because this is the ultimate recipe for catastrophe.

It all comes down to that most fundamental of business principles -

trust.

Trust in finance is absolutely crucial.

There's a reason why the word "credit" in credit markets

comes from the Latin "credere" meaning "to believe"

because actually finance without faith is worth nought.

Credit markets without credit simply do not work.

And nothing highlights the issue of trust more than the scandal

about Libor, which came to light one morning at the end of June 2012.

Libor is an obscure rate-setting mechanism that relates to the

loans that banks make to each other.

And understanding Libor is the key to understanding how banks

and their culture have changed over the last 25 years.

Because it was the Libor scandal, not the crash, which finally

revealed the cynicism that corrupted the heart of the banking system.

-NEWSREADER:

-'Barclays pays £290 million in penalties for trying to

'manipulate lending rates..'

DAVID CAMERON: 'This is a scandal. It's extremely serious.'

-NEWS REPORT:

-'Barclays has admitted that a group

'of traders lied about what it was costing the bank to borrow.'

What has happened now, I think, partly as a result

of the Libor scandal, is that the bankers have got it.

The people running the banks now say,

"Yep, we did mess up big-time. We damaged ourselves,

"our industry and we damaged the economies of our host countries."

Three leading banks - Barclays, the Royal Bank of Scotland

and UBS - had been caught out by the regulators, abusing

the fundamental trust which is at the centre of the banking system.

We knew that this would be a big issue in, ah, publicity terms.

I don't think any of us foresaw that it would be quite this big.

Libor, I think, has crystallised a lot of views in the eyes

of the public around things that were fundamentally wrong with the way

in which the sector operated during that period, during the 2000s.

Libor rates matter because almost everything

we depend on the banks to do for us is in some way tied up with them.

This is the mother of all reference rates.

Some people might be familiar with reference rates in gold

and in oil and, and some people even think of reference

rates in housing markets where homes sell.

But this is throughout our financial system and it affects

all of us, really.

Everything that you borrow, in effect, is influenced by Libor.

Every credit card, every mortgage, every car loan.

The London Inter-Bank Offered Rate, or Libor for short,

was established in the 1980s when the old City values of trust

and fair dealing still held good.

Paul, what are Courtaulds', please?

-285.

-Thank you very much.

I think the first thing I was told when I arrived in the City of London

was, "Listen to the stock exchange

"and the word is, 'My word is my bond,'"

and that was the motto and really it didn't matter what line of country

or business you were in, that's what we attached ourselves to.

If I said I've done it, it's done.

So, when Libor was set up,

no-one ever thought it needed to be formally regulated.

And the key thing to understand is that the whole process is

based on estimates rather than records of actual transactions.

And the way it's set is that banks within London are supposed to

submit to a central point the numbers at which they could lend

money from each other at 11 o'clock on a specific day and the way

it works is that 16 banks submit, the bottom four and the top four

are taken out and the remaining eight are averaged,

so it's quite a simple process.

That process was designed to generate a set of interest rates

in different currencies which have come to be

used as a benchmark for trillions of pounds' worth of contracts

and loans all around the world.

Oi, Gary! Gary!

The system is overseen by the British Bankers' Association.

In fact, it's called BBA Libor.

Libor is an index of the rates that banks lend to each other over

a certain period and it's basically a measure of the real world

interest rates that are out there that different banks can borrow at.

The whole system depends on trust.

Trust that bankers submit honest estimates

and don't collude.

Libor was supposed to be a very transparent

and efficient benchmark for banks to quickly understand

the level at which they could borrow and lend to and from each other.

Nobody challenged it. Why would they?

People trusted each other, that was the way the business was done

and it worked very well because one assumed that life would

go on without troubles for the rest of our lives.

And for years Libor did seem to work well.

In fact, as the landscape

and character of the City changed beyond recognition during the '90s,

Libor oiled the cogs of a booming machine - investment banking.

All these banks came into London

and the combination of that

and this unprecedented period of economic growth meant that the

volume and level of activity, particularly in investment banks,

grew at a fantastic rate.

Rules and regulations were designed to enable the City to grow.

And both Conservative and New Labour governments appreciated

the value - and tax revenue - that the bankers brought in.

The financial sector was growing at an average of 6% a year -

twice as fast as the wider economy.

Lunch? Can't even spell it. It's got one syllable.

But it virtually went out the window. There was

so much money to be made, so much of an opportunity.

I think there is a, probably a disturbing,

sometimes admirable, aspect of human nature. We just enjoy a party

and we had a hell of a party.

We didn't always know we were having a party but we... I think

the Irish knew they were having a party. They had the biggest party.

But in the UK, you know, incomes were rising, property values

were rising, so people were getting better off in terms of the homes

they owned, the assets they had and the income they were receiving.

Britain bought in to the dream

and in those heady days the new banking world took shape.

Barclays was particularly successful at embracing this new culture

and promoting the easy credit so many of us wanted.

-Here, your 4929.

-Ingenious.

What is it?

-It's a Barclaycard, Latham.

-Yes.

And?

Over here.

-Ah, the mission.

-No, the places that take Barclaycard.

The story of Barclays

epitomises the transformation that the City underwent.

The bank, one of Britain's oldest, was founded in the 17th century

by Quakers who believed in honesty, integrity and plain dealing.

By the 1990s, Barclays was a leading high street bank with

11 million customers and a modest investment division on the side.

Then, in 1996, it hired a hot-shot from Wall Street who started work,

appropriately enough, on the 4th of July.

His name was Bob Diamond.

The signing was a turning point for the bank.

He was like Herbert Von Karajan at his very best with

the Berliner Philharmoniker. There he was - except he didn't have white

hair - and he orchestrated them and they all sang and they all danced to

his tune and he did it brilliantly, absolutely fantastically.

I think Bob Diamond

is one of the most competitive people I've ever met.

I'm told playing golf with him is nerve-racking.

Very charismatic, very strong-minded.

You know, the ultimate self-belief, I think.

Powerful, respected by many,

disliked by a few as well, obviously, as we've seen.

He instituted widespread management and personnel changes

and, in his eyes, upgraded a significant part of the talent pool

by bringing in more like-minded American-style investment bankers.

Diamond took the old investment operation,

Barclays de Zoete Wedd, and re-launched it as Barclays Capital.

It was a game-changer.

I mean, no-one should forget that he came into Barclays Bank

and took what was, frankly, a sleepy operation that was

muddling its way through, and through some very savvy business decisions

did remarkable things with the bank to really turn it into a pretty

effective international investment bank specialised in fixed income.

In the cold snap of February 2007, Barclays celebrated its most

successful year ever - record profits of over £7 billion.

The profits from Barclays Capital -

the investment arm under Bob Diamond's leadership -

had risen by over 300% in the previous six years.

It was an extraordinary achievement.

But five years later, it would be BarCap which would cause

Diamond's downfall and threaten to destroy Barclays' reputation.

Other banks were also in the throes of a cultural revolution.

Among them, the rapidly expanding RBS Group,

which by the early 2000s had almost 15 million customers.

If you'd have told the founders of RBS of the kinds of activities

and the breadth of activities and the billions and billions

of pounds it would have had on its balance sheet at the height

of its exciting times as a casino bank, they'd have been horrified.

Under the ruthless leadership of Sir Fred Goodwin, RBS's profits

almost trebled to £9 billion.

As a young manager in the bank at the time, it felt really exciting.

We were growing. We were very proud of seeing

Sir Fred on the cover of magazines

and reading about heading to being the sixth-biggest bank in the world.

It was very exciting to be part of.

As the power, influence and head offices of the bankers

grew during the '90s and early 2000s,

so too did the importance of Libor -

that interest rate the bankers used when they lent money to each other.

Although Libor is set in London,

it's also used in America and all around the world.

The growing reliance on Libor reinforced London's

position at the heart of the global financial system.

It's massive.

There's 300 trillion of contracts based on it.

Let me repeat it - it's 300 trillion of contracts.

That's about six times the world economy,

just to put it in orders of magnitude of dollars of contracts.

And what happened to Libor became a metaphor for the City itself.

It was assumed this obscure system,

which underpinned all our lives, was running smoothly.

And no-one saw fit to ask the bankers awkward questions,

like were they actually submitting accurate estimates?

The economy was booming, consumer credit was easy - too easy -

and we all took it for granted the banks knew what they were doing.

No-one wanted to spoil the party.

Before the crisis, we the regulators -

but the authorities more generally and the politicians who set

the context within which the authorities operate -

were in love with

an ultra-free market point of view of the banking system

where you can just let it rip and where we could rely on the

forces of free market discipline to make it stable and good for society.

But little by little, something was happening.

As investment banks like Bob Diamond's BarCap grew and

became more successful, something began to change in their DNA.

At Barclays Capital as well as a large number of other

investment banks we can now see, in hindsight, that there was

a level of aggression, ambition,

pay and possibly questionable behaviour in some areas that

was out of scale, out of proportion, with where it should have been.

Banking culture was changing.

The narrow pursuit of profit became the overriding motive.

What we lost sight of in this narrow pursuit of profit,

is that actually banks have got a big, complex role in society -

they're not just about making profit for themselves this year,

they are about greasing the wheels of commerce.

They need to be stabilisers and that is part of their duty

and it's part of the return they get.

The step change that happened in banking after roughly

the year 2000 was that it became acceptable to make

money from clients instead of trying to make money for clients.

And it was what bankers did to Libor which finally revealed how

entrenched this cultural shift had become.

In the summer of 2007, as Britain was pre-occupied by unseasonal

floods, in the City, rumours started to circulate about Libor.

The word on the street was that some bankers were trying to

manipulate the Libor rate by submitting misleading figures.

Before long, these rumours reached well-connected journalists.

We've been looking at Libor manipulation for several years.

The thing we couldn't get our head around was

if you can be one of 16 banks contributing to Libor, how much

can you nudge it by and how much difference would that really make?

And I started to hear stories that some banks were being

so concerned about the pressure they were under that they were

starting to influence the Libor rate quite deliberately.

These rumours that Libor was being manipulated coincided with

the beginning of the credit squeeze.

-NEWS REPORT:

-'From early morning, savers have been pressing

'at the doors of many Northern Rock branches,

'waiting for the bank to open.'

Northern Rock was tottering on the brink of collapse

and some other banks were starting to find it hard to raise

enough cash to meet their short-term needs.

Banks feared if they submitted high but accurate estimates

of the interest rates they would be charged if they borrowed

money that day, it would look like they were a poor credit risk.

So some banks were submitting estimates which were lower

than they should have been.

In finance,

the perception of weakness can be as damaging as weakness itself.

During the credit crisis, money was hard to get and particular banks

were finding it harder than some of their neighbours to get money.

And the way that would have shown up is in what the interest rate

they were being charged was.

Much the same as if you have a bad credit history and try

and get a credit card, it's going to cost you more than someone

with a good credit history.

What the banks were able to do, though, because they made up

their own rates, because they were responsible for saying, effectively,

what their credit history and credit-worthiness was, they were lying.

They were putting in rates that were lower than

they actually thought it would cost them to borrow in the market,

which is against the rules of how Libor is set.

By early 2008, a volatile mix of London's investment banking boom,

the narrow pursuit of profit and the minimal oversight

of Libor would lead to repeated gaming of the system.

And remember,

there were no specific regulations relating to Libor.

It was left up to the bankers' own trade association, the BBA,

to oversee it, but, according to them, not to police it.

Well, clearly, Libor should have been better regulated. There's no

doubt about that. The BBA, though, is not a regulator. We don't

have regulatory powers over the members. We can't fine our members.

The statutory regulator was the Financial Services Authority,

the FSA.

Staff had heard the rumours, but, at that stage, didn't think

they merited more thorough investigation.

So there was an awful lot going on in the market which provided

an explanation which did not necessarily lead you to

a conclusion of deliberate attempts to manipulate.

In America, things were different.

Banking regulators there had pounced on the rumours

and were actively investigating them.

I read some articles from the Wall Street Journal

and the Financial Times about Libor and

had the head of our enforcement group come in, Steve Obie.

And I said, "Steve, is this something we should be looking at?"

And he said, "Good news, boss. We're already looking at it."

One Barclays employee let slip to the team

at the New York Federal Reserve that the bank was behaving dishonestly.

"We know we're not posting an honest Libor.

"We're doing it because if we didn't,

"it draws unwanted attention on ourselves."

In May 2008, the Americans tipped off the Bank of England

with their concerns.

They sent a memo suggesting procedures...

"..to prevent accidental or deliberate Libor misreporting."

But, incredibly,

this memo didn't ring alarm bells in Threadneedle Street.

What's undoubtedly the case is the Americans were on it

back in 2008 and they told the regulators here,

including Mervyn King, "You've got an issue here."

And what seems to be case is that, by and large, nothing was done.

So, on the eve of the financial crash, the bankers' trade body, the

industry regulator and the Bank of England were all aware of concerns

about possible rate-rigging but none of them acted decisively to stop it.

Questions of trust and honesty about Libor

didn't appear to be top of the agenda.

By chance, in the same week at the end of May

when the Americans flagged up to London their concerns

about Libor, a Barclays executive gave an interview to Bloomberg TV.

I think there was a general feeling at the time that something

wasn't quite right with Libor.

And I went down into one of our booths and I interviewed

Tim Bond and I asked him a number of questions about Libor

and about how it was set

and if things were... if it could really be trusted.

The candour of his answer took everyone by surprise.

I would say from mid-to-late summer last year, really through to,

I guess, last month, the rates that banks were

posting in to the BBA became a little bit divorced from reality.

No-one had said this on the record in a television interview.

The impact was almost immediate in terms of huge media

coverage of Libor, of Tim Bond

and what was going on, and you had to have sympathy with Tim

because he's not the person at fault here, he was just the messenger.

So, the signs were all there,

but no-one appeared to be taking decisive action.

And then everything changed.

The credit squeeze became a crunch...

..and then a crash.

It was September 2008.

The heady days when investment bankers thought everything

they touched would turn to gold were swept away.

The RBS group was rescued with an emergency bail-out

of £45 billion of taxpayers' money.

I think the interesting thing when you look back now,

you look back at that time and think,

"Was I really not looking at things properly? And what did I miss?"

And many of us have spent a lot of time thinking about

what was it in the culture that meant

that we didn't actually see what was happening.

Barclays came out of the crisis better than most.

It avoided having to accept a government bail-out.

And when other buyers walked away from collapsed investment bank

Lehman Brothers, Diamond snapped it up at a bargain-basement price

It was a masterstroke.

Diamond's reputation soared.

History has shown it's been a fantastic acquisition,

it's been very important strategically

and it was done on very advantageous financial terms.

In 2008, many gave bankers the benefit of the doubt when

they said the crash was caused by global events beyond their control.

But that was before we knew what was going on with Libor.

When the story finally came out, it would raise difficult questions

about whether our financial system can be trusted.

In the post-crash chaos, the credit markets seized up.

Banks stopped lending to each other.

But they still had to submit a daily Libor estimate

even though no-one was borrowing.

And in that climate of fear, some banks rigged their submissions

to make themselves look as financially sound as possible.

The normal rules of engagement, in many ways, had been suspended

and the fact that regulators and people at the Bank of England

were paying close attention to what was happening in the markets,

the fact that bank financiers themselves were saying

"Well, we don't know what's happening but we're going to do our level best

"to try and keep confidence going in the system,"

I think is understandable.

This deliberate understating of Libor estimates

became known as low-balling.

What low-balling was was people trying to keep their Libor

submissions down or in the middle of the pack to ensure that they didn't

stand out as someone that other banks didn't want to lend money to.

Some argue that, at the height of the crisis,

low-balling was justifiable.

I don't regard that as a serious offence or even an offence at all.

I think, at the time, the banks were not lending to each other,

there barely was a Libor out there.

The most important thing for the authorities

and the banks was to avoid the panic, which was already very serious,

getting worse than it was.

And I think unnecessary fuss has been made about what may have

happened in a few weeks in 2008.

I've a lot of sympathy, then,

with the editing of the Libor rates, shall we say.

In America, they see things differently.

I don't think it's good to lie to the public.

I don't think it's particularly good if politicians do it,

I don't think it's good if financial market participants do it.

It's... Maybe it's just how my grandmother taught me.

But it's also the law.

It's not... It's not allowed under our regime.

And why is it not allowed?

Because others rely on these markets.

Others rely on these reference rates.

Bankers manipulating Libor submissions to try

and keep the system afloat is one thing,

but what about massaging the numbers purely for personal gain?

By 2009, the British regulators were catching up with their American

counterparts and, as they dug deep, they made an extraordinary

discovery - cheating and lying at the heart of the banking system.

What it illustrated was a group of people being paid a large

amount of money, who's attitude to what they were doing was

so deeply cynical, who clearly did not feel that they were doing

something which had to be conducted in integrity

and which was important, you know, to the real economy.

They just thought it was a computer game where you had the same right

to, as it were, cheat and kill the other guy

as you have on a computer game.

The FSA trawled through the data archives of Barclays, RBS

and the Swiss bank, UBS.

Among the millions of emails, instant messages and telephone

conversations was evidence that traders from all three banks

were trying to manipulate the market for their own financial advantage.

"It's just amazing how Libor fixing can make you that much money.

"It's a cartel now in London."

"Dude, I owe you big time!

"Come over one day after work and I'm opening a bottle of Bollinger."

"mate yur getting bloody good at this libor game.

"think of me when yur on yur yacht in monaco wont yu?"

Traders were scheming to rig the Libor estimates

submitted by banks in order to skew the resulting average rates

and win themselves a bumper pay-out on their trades.

It's a bit like a gambler, really. He has a series of bets out there

and he wants certain things to happen.

And so this swaps trader says, "I'd really like Libor to be high

"because actually I'm a net recipient of Libor-related funds,

"and therefore the higher Libor is,

"the more money is coming into my book."

The shifts in Libor are very small,

it might be the difference between 2.70% and 2.71%.

That change is called one basis point,

which is one 100th of a percent

and, to put it into perspective,

if you have an investment of 1 billion running for

one year and the interest rate is one basis point higher, you only make

an extra 100,000. That's 100,000 of change on a 1 billion investment.

Imagine if you could set your own credit card rate,

and you had a couple of billion pounds on a credit card.

You'd be very motivated to have a lower rate than a higher rate,

if you could do that.

"Pls go for 5.36 Libor again,

"very important that the setting comes as high as possible. Thanks."

I learnt about the traders' activities in one of the regular

meetings that we had between the board committee and the lawyers

who were acting on our behalf and I was sick to my stomach.

Sick to my stomach,

because I realised just what an appalling thing it was and

I realised what a serious implication it would have for the bank.

"Cld you do me a favour?

"Would you mind moving your 6 month Libor up a bit today?

"I have a gigantic fix."

If you have a situation where a human being is going to have

more money if he cheats, a lot of them will be tempted to cheat.

And you have to have controls in place to make sure they don't.

So what controls were meant to oversee Libor?

First in line was the management of the banks. They failed.

Second was the British Bankers' Association, here,

which was in charge of overseeing the Libor rate.

It failed too.

I talked to people at the British Bankers' Association repeatedly,

saying, "I'm hearing these stories. It just doesn't seem to make sense."

And I was very, very strongly knocked back and I was told that

my thoughts were ridiculous. I was told that I was scaremongering.

I really had the full weight of the establishment and institutions

come back on me trying to shut me up and stop me looking into it.

-INTERVIEWER:

-Do you think, with hindsight, it would have been

better that Libor was more strictly regulated by the BBA

when it was set up?

Again, I can't talk about the past, partly because I wasn't involved,

but also for a whole load of legal reasons.

I can't talk about that activity.

The BBA may not choose to speak about the Libor scandal now,

but we do know what they've said in the past.

As far back as 2008, a treasury manager at Barclays was

talking about Libor with the BBA and he said,

"We're clean, but we're dirty-clean, rather than clean-clean."

The BBA responded, "No one's clean-clean."

How is it that all the layers of control had failed to stop

yet another City scandal?

There is a legitimate criticism, I have to say, both of the FSA

and the Bank of England, that they

didn't respond to the fact that something funny was going on

with Libor and say, "Is there something to be looked at there?"

What they also both did was assume that the responsible

authority for looking after this was the British Bankers' Association.

CHEERING AND SHOUTING

January the 1st, 2011.

As the regulators continued their investigations into Libor,

Bob Diamond had much to celebrate.

-NEWS REPORT:

-'One of the world's highest-paid investment bankers,

'Bob Diamond, is to become chief executive of Barclays Bank.'

Reported to be worth £100 million, Diamond had big plans.

In terms of stamping his authority, he effectively wanted to

control things much more from the centre.

Some leaders just prefer delegation and others... And nurturing

and acting as consiglieres to their various regional or

functional leaders and others prefer to have more control from the top.

Bob preferred clearly to have more control from the top.

He believed it was essential to remind the public of the vital

role banks play in society

and draw a line under their mistakes of the recent past.

There was a period of remorse and apology for banks.

I think that period needs to be over.

Bob Diamond was one of the few who actually was willing to get

out there, talk to the media, appear on platforms and actually

simply present a face to the rest of the world of modern banking.

And for that, frankly, he does deserve credit.

Diamond realised that bankers' behaviour leading up to the crash

was out of step with the public mood in the new age of austerity.

In one influential speech he repeatedly referred to the

importance of trust

and argued that banking had to restore its moral compass.

A senior economic adviser at the White House put a question to me.

"Do you think banks can be good citizens?" he said.

I wanted very much to answer yes, but before I could reply he said,

"If the answer is yes,

"think about that fact that no-one will believe you."

I did think about that.

I've thought about it quite a bit over the past three years.

I want to use this opportunity tonight to share with you

my views on why the answer to that question must be yes

and that rebuilding trust requires banks to be better citizens.

I believe in this passionately.

Bob Diamond was at the pinnacle of his career.

He was lauded as the most successful banker in London

and he had taken the lead in articulating how banks needed

to rehabilitate their role in society.

But Diamond would never have the opportunity to

implement his grand vision.

-NEWS REPORT:

-'The bonus battle goes on.

'Labour says RBS is just the beginning.'

-NEWS REPORT:

-'The bonus backlash.

'Politicians blame each other for allowing

'the Royal Bank of Scotland pay-out.'

The mood in Britain was hardening.

As the recession continued, a rift was opening between the City

and the rest of the country.

-NEWS REPORT:

-'Newsbeat.

-The boss of RBS, which is mostly owned

'by the taxpayer, is getting a bonus of just under a million pounds.

'The bank says he's earned it.'

-NEWS REPORT:

-'We seem to have the banking industry

'and then we have the real world.

'The banking industry lives in a bubble.'

-NEWS REPORT:

-'I've had to come to bed early today because I can't afford

'to have my central heating on, so I'm in bed now early.'

-NEWS REPORT:

-'Protesters who say politicians and bankers

'are driven by corporate greed have

'continued their demonstrations in cities around the world.

'In London...'

I would say that 2012 was a watershed year for the banks.

The banks became the centre of the political universe, if you wish.

Bashing the banks became something that was almost

a strategic imperative for politicians -

they had to be seen to be doing it.

Everything just seemed to come together in one, just, huge

bucket of bad news, bad press and opprobrium all round.

And then at the end of June 2012,

just as the country was gearing up for the Olympics,

the public's anger finally came to a head.

'Barclays bank has been fined nearly £300 million

'by regulators in Britain and the United States...'

'..for trying to manipulate the rates at which banks lend to each other.'

The British and American regulators simultaneously

published their reports into Libor fixing at Barclays.

After about 25 minutes of reading this document,

I concluded that it was absolutely shocking and I hadn't read

anything like this in years. In fact, I could scarcely believe it.

The report revealed that on at least 250 occasions over four years,

Barclays staff had manipulated Libor and other rate submissions.

The bank was fined £290 million.

It was a public relations disaster.

We obviously had to take a view before we made

the announcement as to what the right reaction should be for us

and we tried to measure the vile nature of the activity

with its scale and produce a proportionate response.

What happened was, when the announcement went out,

the public reaction focused far more on the nature than the scale

and I think the subsequent reaction

did take us by surprise because it wasn't as we had judged it.

We misjudged that.

-NEWS:

-'Let's look at the papers.

'Eight minutes past six and here is a question.

'Who is the most hated man in Britain?

'Well, step forward Bob Diamond of Barclays.

'There's no doubt about it.

'The papers go for him. Every single one of them.'

Despite the firestorm of bad publicity engulfing his bank,

Bob Diamond saw no reason to stand down.

But other powerful forces including the Bank of England

and the FSA disagreed.

There could be no clearer symbol of the shift in power

from the pre-crash era

when bankers were seen as the most powerful figures in the City.

Now it was the regulators who were determined to stamp their authority.

I had a conversation with Marcus Agius,

the Chairman of Barclays, on the evening of Friday June the 29th and

what I said was that

a major cultural change was required at Barclays.

And that they needed to reflect on whether Bob Diamond would be

capable of managing and driving through that culture change,

but, even if they believed he was,

whether the external world would believe that.

The conversation was actually on a different subject

and at the end of the conversation

he did talk about the Libor situation, but actually

that exchange was fairly brief

and fairly narrow and

I don't think it was quite as extensive as others may think.

-NEWS REPORT:

-'Huge pressure now on Bob Diamond.

'Lots of questions to be answered. Can he survive this?'

Diamond continued to hold his ground.

But what would chairman Marcus Agius decide to do?

Outside my office at Barclays is a corridor

and down the corridor are the portraits of former

chairmen of Barclays and they go back through the centuries and

I felt the pressure of that history bearing down on me and because

the reputational hit that had happened over the Wednesday,

Thursday, Friday had been so severe that some greater response

was necessary and I felt, personally, it was the right thing to be done.

I didn't enjoy it, of course not,

but I thought it was the right thing to do.

-NEWS REPORT:

-'What I've literally heard in the last few minutes

'is that Marcus Agius, the chairman of Barclays, will be resigning.'

Are you the fall guy?

But his resignation wasn't enough.

Should Bob Diamond resign as well?

The public wanted more.

As did the establishment.

The message that the authorities - the FSA and the Bank of England -

were giving to Barclays and particularly to Marcus Agius

was that they had to face up to the reality,

and the full reality, of the situation

and that it was untenable to think the they could go on

with the same management almost as if not much had happened.

The next day, Monday the 2nd of July, the final act played out

to the dismay of some and the satisfaction of others.

I received a request to go

and call on the governor of the Bank of England and to do so

with my deputy chairman.

And we met at six o'clock in the evening and,

to put it simply, it was made very clear to us that the governor,

who had spoken to the chairman of the FSA and indeed had spoken to the

Chancellor of the Exchequer, was delivering us a message that the

regulatory authorities no longer had confidence in our chief executive.

A very, very strong message.

-NEWS REPORT:

-'Breaking news story this morning.

'Barclays Chief Executive Bob Diamond

'has resigned with immediate effect.

'That news just coming in in the last few minutes.'

The paradox was that Bob Diamond had articulated how banking should

change and he had the personality to force change through.

But he could never disassociate

himself from the culture that he had come to epitomise.

When I heard that Bob Diamond had resigned, my first thought was,

"How extraordinary," but also, "How sad."

Because to the end of the day, it wasn't the financial crisis that

tripped him up, it wasn't some flashy derivative, it was boring,

stodgy old Libor deep within the operation. It's a tremendous irony.

I certainly was surprised that that that the regulators felt

the relationship between them and Bob was so poor and they thought he

was being such a bad chief executive that they thought he ought to go.

I mean, I was I was shocked at that.

I mean, I just do not believe that regulators should do that.

Not in the way that was done - very quickly. You know, I think

boards of directors have the job of deciding who should be

the chief executive.

I mean Bob Diamond, let us be clear, did nothing which

was against our rules or which we felt was enforceable against.

But something went wrong with the culture of Barclays Investment Bank.

And Bob Diamond wasn't just the head of it,

he had been the head of it for a whole decade and indeed he had been

closely identified with the whole build of that, the culture of it.

The very fact that he was, as it were, the charismatic leader of that

has to carry with it the implication that if something seriously

goes wrong there, he is the person who will have to resign.

Two other banks have so far been exposed as trying to

manipulate Libor for their own benefit.

The Libor fixing at RBS was much more pervasive than at Barclays

and it was given a correspondingly bigger fine - £390 million.

I think it's probably fair that RBS gets particular

scrutiny on behaviour - things like Libor, other aspects of our

business - because the taxpayer's got such a major stake. And we

try to be as sensitive as we can to those sorts of things, inevitably.

But no bank, whether it's owned by taxpayers or shareholders,

wants to get involved in something like Libor. It's just unacceptable.

But the most serious case so far involves the Swiss bank UBS.

It showed a level of manipulation far in excess of what was

discovered at Barclays and RBS.

There was evidence of 11 managers being directly

involved in the conspiracy.

The bank was fined nearly £1 billion, but, unlike at Barclays,

no board members have resigned over Libor.

UBS declined to be interviewed.

They were rigging this market for the best part of a decade.

They had 40 or 50 people up to it. They had chat lines

internally to inform one another what was going on and

they had what were so-called wash trades specially designed. That is

trades which were quite pointless except to reward a particular

person who was participating in this, frankly, I would call it a fraud

with commission, but which had no other purpose beyond doing that.

All of this going on in a massive scale.

In the City, the next generation of skyscrapers is taking shape.

This 47-floor tower is rising over the site

of the medieval Leadenhall Market.

As the landscape changes, the banks say they're changing too.

They promise they've learnt from their past mistakes,

but can we trust them this time?

Well, I think we have to be realistic that rebuilding

trust in the banking industry is going to take a long time

and it's a product of what banks do, not what they say.

So, firstly, banks have to change their behaviour then people have

to perceive that change then they have to internalise it and finally

they have to give banks credit for it and I think that's going

to take time, but it's, frankly, the responsibility of the industry and

of Barclays to create that change in perception through what we do.

I think we need our banks to be banks,

if I can put it as crudely as that.

I think we need our banks to behave properly. They, of course, need

to make an appropriate return for their shareholders but they need to

be strong financial institutions doing an absolutely critical job in

making sure that their contribution to the economy is effective.

There's no silver bullet to solving the problems of the banking sector

and there never will be.

We'll have to operate on many fronts -

regulation, improving corporate governance and incentives and

the bonus structure, getting really powerful sanctions in place so those

who behave badly finally end up in an orange jump suit and end up in

jail and we need to think carefully about the structure of banking.

It was the Libor scandal that finally gave the impetus to

reform the City.

Now there are new leaders and new regulators.

And soon there'll be new laws.

But is that enough?

We bailed the banks out and they let us down.

Now City leaders believe bankers need to prove

the days of tolerating lies and cheating are over.

The ingenuity of the human mind is such that will you ever,

ever devise a system which is completely foolproof to

everyone trying to commit a fraud? I don't think so.

It's much more important to create the right culture

in the institutions and to, if there has been

a lacking of the right approach to the business,

then that's what we need to change going forward, rather than thinking

that we can cover for every single eventuality in every situation.

The taxpayers, the citizens, our fellow citizens in all

our democracies, have discovered that the values, of the

financial sector were very different were from what they knew and very

different from what they consider appropriate in a modern society.

I think that now the people would not accept, as they did

in the past, to help considerably the financial sector.

Because, again, they have a lost a large part of their confidence.

A lot of people asked me why I took on a job which is not the easiest

job in the world, representing probably the most tarnished and most

unpopular industry in the country and a left-wing friend of mine said,

"It's like defending the tobacco industry," and I said,

"The difference is that, apart from the fact that banks

"don't kill people, we actually need banks and we need

"to restore trust in banks and it's essential not just for banks

"but for the wider public and the UK economy as a whole

"that banking gets out of this vicious scandal and banker bashing,

"and is returned to a normal, healthy sector of the economy,

"promoting economic growth

"and ensuring there's a healthy, affluent society."

But the future shape of the City

isn't just up to those who work there.

There are difficult questions which we all need to address -

questions about what we really want from our banks.

The crucial question that British politicians need to ask themselves -

and, frankly, they ought to be asking the public too -

is do we think that finance is there to be a utility

and simply serve the rest of the economy

or do we think that it should be a business

and a profit-seeking enterprise in its own right?

But if you want finance to be a utility then you're not

going to have the profits and the dynamism and, frankly,

the entrepreneurial drive that's made London so vibrant in recent years.

And you're also not going to have a big part of the British

economy that's been producing taxes and driving, pushing forward growth.

However, if you say, "Well, actually, I do want finance to be

"a profit-seeking exercise and to have London as an international

"crossroads of global finance," then that comes with risks attached.

As for Bob Diamond,

after his resignation there was a final humiliating public appearance.

-NEWS:

-'It promises to be a really interesting

'and pretty explosive session tomorrow.

'Certainly this will be the hottest ticket in town.'

He was called before MPs for a hearing which had been arranged

when he was still chief executive.

It's 16 years ago today on July 4th 1996 that I began at Barclays,

and it's been 16 years of just tremendous enjoyment.

Bob Diamond had an answer for every question they threw at him -

every question except one.

I just wonder, Mr Diamond, if you could remind me

of the three founding principles of the Quakers who set up Barclays?

I could help and I could offer to tattoo them on your knuckles,

if you want, because they are honesty, integrity and plain dealing.

It does say everything, in my view, about the way in which

banking standards and banking ethics and morality have changed.

The bank manager who used to have to learn the founding

principles of Quakerism that created Barclays and the man who brought the

bank to its knees, who didn't have a clue what those principals were.

The fallout from the Libor scandal continues.

At least 12 more banks are being investigated by regulators

either here or in the United States.

And the Serious Fraud Office has launched a criminal investigation.

As has the American Department of Justice.

The much-criticised Financial Services Authority

has been disbanded.

The Financial Conduct Authority has been set up in its place.

The British Bankers' Association will no longer be

responsible for overseeing Libor.

Reputations built up over decades have been shredded.

It'll take a long time to clean up the mess that Libor left behind.

Next time - how bankers are still taking disastrous risks

as they hunt for profits in the fallout of the crash.

How has the banking crisis affected you?

Get your voice heard and join the debate at The Open University.

Go to bbc.co.uk/bankers

and follow the links to The Open University.

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