Few people know what Libor is and precious few know how it works (or should I say, how it is supposed to work). It was therefore an ideal vehicle to create yet another banking scandal.
In simple terms, the London Inter-Bank Offered Rate is the rate of interest that banks charge when they lend to each other in the UK. It is a vital component of the banking scene, which is why other major trading cities, such as New York with Nibor and Tokyo with Tibor, have their own equivalents.
Banks with surplus cash lend on a short term basis to banks that need the odd few million. It works to mutual benefit, as those in surplus earn interest on their money and those in deficit live to fight another day. Theoretically, the market sets its own rate, as any market is supposed to do, according to supply and demand.
Its importance was demonstrated when it broke down in the aftermath of the 2008 financial crisis, a classic case of how you never appreciate what you have until it is not there.
You might think, as I did before 2008, that this market would be difficult to manipulate with too many banks and too much cash sloshing around. We now all know that such is the arrogance and ingenuity of banks that they can manipulate any market if they are given the chance and short term profits drown out any trace of guilt.
None of this would matter too much if it were just a case of banks cheating on each other. It matters because Libor indirectly affects rates charged for mortgages and loans.
The point of this story, and why it happened in London, is being overlooked as headlines proclaim the massive fine for Barclays. It is becoming increasingly clear that several banks were involved and that manipulation may have been endemic.
Regulatory powers were taken away from the Bank of England (BoE) when the Financial Services Authority (FSA) was set up. Did this manipulation of Libor happen when the Bank of England controlled the banking sector? It seems to have cropped up only under the tripartite regulatory system - BoE, FSA and Treasury - which regulated nothing properly.
It has become fashionable to criticise BoE governor Sir Mervyn King for many economic and financial woes. I think we would have had far less of a crisis if he had been left in charge. As it is, the banks are once again being dragged into an expensive defensive action.
With Barclays (BARC) already in the dock and HSBC Holdings (HSBA) amongst others possibly in the line of fire, the two banks that looked to be the soundest investments in the sector have been tarnished. Perhaps it is a reflection of how little anyone understands the inter-bank market that Barclay shares actually rose on the day that a £290 million penalty was revealed.
Eventally, though, investors cottoned onto the reality that the banking sector is still staggering from one crisis to another. The next crisis is already upon us. The FSA has, in its dying days, decided to do something useful and force banks to compensate small businesses that were tricked or bullied into expensive and useless interest rates swaps. Once again the FSA is acting to shut the stable door years after the horse has bolted instead of providing proper stewardship at the time.
Some commentators are arguing that greater regulation of the banks would put shackles on the sector to the detriment of The City and the UK. Left largely to its own devices, the banking sector has managed to do its own damage and continues to do so.
Apologists for the wretched banking sector argue that it is not lack of regulation but bad regulation that has caused the crisis. That argument needs to be turned on its head. We do not need less regulation of banks, we need more proactive regulation of the sort that the Bank of England used to provide.
I have long argued that every investor should have one dividend paying bank in his or her portfolio. That argument gets harder and harder to sustain. I would not buy more bank shares at current lower levels.
Low Five
It is now nearly five years since I wrote Shares Made Simple, the beginner's guide to the stock market. The storm that engulfed the world's financial system was still only a growing cloud on the horizon and bank shares were near their peaks as I beavered away.
Alas, the book was published in November just in time to herald the collapse in share prices. Nonetheless, it has sold over 15,000 copies as savvy investors realised that there was still money to be made by those who knew what they were doing - indeed, the need to be au fait with how the market works was all the more pressing.
Encouraged by this demand, I have now fully revised the book and it was published in its second edition this week. The main changes have been in producing up-to-date case studies and amending the section on takeovers to include the tightening of the Takeover Code. The London Stock Exchange trading system has also been developed further over the past five years.
The need to be fully informed is as pressing as ever; the opportunities were never greater.
Market Performance: June 25 – 29, 2012
FTSE 100: +1.42%
FTSE 250: +2.28%
FTSE All Share: +1.53%
FTSE Smallcap: +1.25%
FTSE AIM 100: +3.71%
FTSE Fledgling: +0.47%
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