The recent departure of Robert Diamond from Barclays marks a watershed. To be sure, CEOs of major banks have been forced out before. Chuck Prince lost his job at Citigroup over excessive risk-taking in the run-up to the financial crisis of 2008 and, more recently, Oswald Grubel of UBS was pushed out for failing to prevent unauthorized trading to the tune of US$2.3 billion.
However, Diamond was a banker supposedly at the top of his game. Barclays, it was claimed, had come through the 2008 to 2009 crisis without benefiting from UK government support. Also, while his bank had been found in violation of various rules recently, including on products sold to consumers and on how it reported interest rates, Diamond had managed to distance himself from the damage.
Press reports indicate that regulators were willing to give Diamond a free pass — right up to the moment when a serious political backlash took hold. Diamond started to fight back, pointing an accusatory finger at the Bank of England. At that point, he had to go.
LESSONS
There are three broader lessons of Diamond’s demise at Barclays.
First, the political backlash was not from backbenchers in parliament or uninformed spectators on the margins of the mainstream. Top politicians from all parties in the UK were united in condemning Barclays’ actions, particularly with regard to its systemic cheating on the reporting of interest rates, exposed in the LIBOR scandal. (The London Interbank Offered Rate is a key benchmark for borrowing and lending around the world, including for the pricing of derivatives).
Indeed, British Chancellor of the Exchequer George Osborne went so far as to say: “Fraud is a crime in ordinary business; why shouldn’t it be so in banking?”
His clear implication is that fraud was committed at Barclays — a serious allegation from the UK’s finance minister.
After five years of global financial sector scandals on a grand scale, patience is wearing thin. As Eduardo Porter of the New York Times put it: “Bigger markets allow bigger frauds. Bigger companies, with more complex balance sheets, have more places to hide them. And banks, when they get big enough that no government will let them fail, have the biggest incentive of all.”
Second, Diamond apparently thought that he could take on the UK establishment. His staff leaked the contents of a conversation he claimed to have had with Paul Tucker, a senior Bank of England official, suggesting that the central bank had told Barclays to report inaccurate interest rate numbers.
Diamond apparently forgot that the continued existence of any bank with a balance sheet that is large relative to its home economy — and its ability to earn a return for shareholders — depends entirely on maintaining a good relationship with regulators. Barclays has total assets of around US$2.5 trillion — roughly the size of the UK’s annual GDP — and is either the fifth or eighth-largest bank in the world, depending on how one measures balance sheets. Banks at this scale benefit from huge implicit government guarantees; this is what it means to be “too big to fail.”
Diamond apparently believed his own rhetoric — that he and his bank are critical to economic prosperity in the UK. The regulators called his bluff and forced him to resign. Barclays’ stock price rose slightly on the news.
The final lesson is that the big showdowns between democracy and big bankers are still to come — both in the US and in continental Europe. On the surface, the banks remain powerful, yet their legitimacy continues to crumble.
JP Morgan Chase CEO Jamie Dimon presided this year over reckless risk-taking to the tune of nearly US$6 billion, yet his job apparently remains secure. Dimon even remains on the board of the Federal Reserve Bank of New York, despite the fact that the New York Fed is deeply involved in the investigation not only of JP Morgan Chase’s trading losses, but also of its potential involvement in the broadening LIBOR scandal.
EFFECTIVE RESISTANCE
As president of advocacy group Better Markets Dennis Kelleher documented in recent US Congressional testimony, two years after the passage of the Dodd-Frank legislation, the US banking system continues to fight hard — and effectively — to undermine meaningful reform. (Kelleher’s testimony is a must-read assessment, as is his opening statement to the hearing).
Yet progress is nonetheless being made. Dimon is the public face of megabanks’ resistance to reform; repeated and public egg on this particular face strengthens those who want to rein in these banks’ excessive and irresponsible risk-taking.
Meanwhile, the European situation looks explosive. The EU’s approach to bank regulation encouraged financial institutions to load up on government debt — supposedly a “risk-free” asset. Now, given the profound sovereign debt crisis in the eurozone periphery, government defaults threaten to take down the big banks. The European Central Bank has provided a great deal of emergency “liquidity” funding to banks, which they use to buy even more government debt. This holds down interest rates on that debt in the short term, but creates even bigger potential losses in the case of potential default.
Banks and politics are deeply intertwined in all advanced economies. Diamond discovered that, ultimately, politicians trump bankers — at least in the UK.
However, what really matters is legitimacy and informed public opinion. Do you really believe the increasingly dubious notion that megabanks, as currently constituted, are good for the rest of the private sector, and thus for economic growth and job creation? Or do you begin to consider more seriously the increasingly mainstream proposition that global megabanks and their leaders have simply become too powerful and dangerous?
Simon Johnson, a former chief economist of the IMF, is co-founder of a leading economics blog, a professor at Massachusetts Institute of Technology, and a senior fellow at the Peterson Institute for International Economics.
Copyright: Project Syndicate
Recently, China launched another diplomatic offensive against Taiwan, improperly linking its “one China principle” with UN General Assembly Resolution 2758 to constrain Taiwan’s diplomatic space. After Taiwan’s presidential election on Jan. 13, China persuaded Nauru to sever diplomatic ties with Taiwan. Nauru cited Resolution 2758 in its declaration of the diplomatic break. Subsequently, during the WHO Executive Board meeting that month, Beijing rallied countries including Venezuela, Zimbabwe, Belarus, Egypt, Nicaragua, Sri Lanka, Laos, Russia, Syria and Pakistan to reiterate the “one China principle” in their statements, and assert that “Resolution 2758 has settled the status of Taiwan” to hinder Taiwan’s
Singaporean Prime Minister Lee Hsien Loong’s (李顯龍) decision to step down after 19 years and hand power to his deputy, Lawrence Wong (黃循財), on May 15 was expected — though, perhaps, not so soon. Most political analysts had been eyeing an end-of-year handover, to ensure more time for Wong to study and shadow the role, ahead of general elections that must be called by November next year. Wong — who is currently both deputy prime minister and minister of finance — would need a combination of fresh ideas, wisdom and experience as he writes the nation’s next chapter. The world that
Can US dialogue and cooperation with the communist dictatorship in Beijing help avert a Taiwan Strait crisis? Or is US President Joe Biden playing into Chinese President Xi Jinping’s (習近平) hands? With America preoccupied with the wars in Europe and the Middle East, Biden is seeking better relations with Xi’s regime. The goal is to responsibly manage US-China competition and prevent unintended conflict, thereby hoping to create greater space for the two countries to work together in areas where their interests align. The existing wars have already stretched US military resources thin, and the last thing Biden wants is yet another war.
Since the Russian invasion of Ukraine in February 2022, people have been asking if Taiwan is the next Ukraine. At a G7 meeting of national leaders in January, Japanese Prime Minister Fumio Kishida warned that Taiwan “could be the next Ukraine” if Chinese aggression is not checked. NATO Secretary-General Jens Stoltenberg has said that if Russia is not defeated, then “today, it’s Ukraine, tomorrow it can be Taiwan.” China does not like this rhetoric. Its diplomats ask people to stop saying “Ukraine today, Taiwan tomorrow.” However, the rhetoric and stated ambition of Chinese President Xi Jinping (習近平) on Taiwan shows strong parallels with