Barclays: No more slack
The Barclays Libor scandal threatens to blow up more than the reputation of a bank, its CEO, its chairman and a host of (as yet unnamed) "big boys" in its derivatives office. What is at stake is the implicit deal the British political establishment has done - and re-done - with the banks since 2008.
Barclays was at the centre of the Lehman crisis. It had bid to take over Lehman Brothers but the British authorities, at the express insistence of Alistair Darling, vetoed the bid on the grounds that it could sink Barclays itself. "The British screwed us," Hank Paulson told Lehman's bosses.
Once Lehman went bankrupt, Mr Darling and Gordon Brown were forced to nationalise RBS, HBOS and Lloyds - not in one go, but after a series of panicked attempts to broker a merger (between Lloyds and HBOS) failed, and as the true scale of these banks' losses became clear.
Throughout the crisis weeks of late 2008 they also struggled with Barclays. They had forced the banks to commit to recapitalisation, and money was on the table; but Barclays refused to take government money. Instead, it used the implicit guarantee of bailout - "too big to fail" - to attract foreign capital into the bank: £8bn from Abu Dhabi and Qatar.
Its argument at the time was: We are not in trouble.
What the Libor scam gives is a glimpse - but only a partial glimpse - of how Barclays survived.
The key here, among numerous wrongdoings, is that instructions were given by Barclays managers - is not clear how high up this went - to systematically understate the interest rate Barclays expected to borrow at, to make it look like - as one e-mail put it - they were not "in the s**t".
Market forces were saying one thing: that Barclays' cost of borrowing looked high compared to its peers. Yet the market was able to be manipulated to say otherwise, in part because other market participants - defying the iron laws taught in business schools - also found it in their interest to manipulate the market.
What was troubling Barclays, along with other banks, was its exposure to bad sub-prime and other securitised loans.
So in addition to manipulating the interest rate, in September 2009 Barclays also resorted to a deft piece of financial engineering to deal with this exposure. It moved £7bn of toxic debt off its books into a vehicle called Protium, registered in the Cayman Islands, staffed by former Barclays traders and 96.5% financed by, you guessed it, a loan from Barclays.
Then things went quiet. Darling and Brown rejected calls for a radical overhaul of the banking system; their 2009 Financial Services White paper was described by George Osborne as "more of a white flag than a white paper". Citing the City's contribution to the UK economy, Labour rejected a major restructure of regulation.
Instead it concentrated on forcing the UK banks to build up higher capital cushion.
Meanwhile, Barclays investment bank boss Bob Diamond led the line at the Davos Summit in 2010 for the banking industry's resistance to structural change in Britain and the US, both in public and private.
Then in September 2010 the Barclays board appointed Diamond to replace John Varley as the bank's global CEO. The reward for taking the bank to the precipice and then forcing a large chunk of it to be sold to the Gulf monarchies was the top job.
Diamond duly led the line again for the banking industry - engaging Osborne and the Treasury in the initiative that was to become "Project Merlin" - a voluntary agreement to increase lending to small business in return for, and end to, the bonus caps and one-off tax grabs introduced by Darling.
But then things began to unravel.
First, Protium had to be taken back onto the books. The US regulator, the SEC, told them: "We are unable to concur with your conclusion that the non-consolidation of Protium is appropriate." The bank lost half a billion pounds on the transaction.
Then, Labour's Chuka Umunna launched his famous ambush on Diamond at the Treasury Select Committee, where Diamond had to admit he did not know how many subsidiaries the bank was running in tax havens, nor how much corporation tax it had paid (he later revealed it had paid just £113m on a global profit of £4.6bn.)
Then - though Barclays had lobbied successfully against Vince Cable's preferred option that would have broken the bank up - the Vickers Report, accepted in full by George Osborne, would require the bank to erect strict internal separation mechanisms between the operations that had become so blurred in the years of malfeasance.
Then shareholders finally woke up. At this year's AGM 31% of shareholders failed to back the company's remuneration report - ie its bonus handout to Diamond and his team. The revolt was led by the usual suspects - small ethically-focused investment funds like F&C, but bigger funds - including Fidelity, M&G etc - also joined the rebellion.
However, Barclays largest shareholders are as follows: Sheikh Mansour Bin Zayed Al Nahyan of Abu Dhabi (6.2%), Qatar Holding (6.6%), Nexus Capital (Abu Dhabi) (6.2%) and the giant global investment manager BlackRock (6.5%) - itself 20% owned by Barclays.
These are the major institutions which the theory of free market capitalism says are supposed to rein in the management of Barclays, preventing it - in their own interest - from taking part in scams or self-enriching bonus schemes.
But they don't. If you want to know why, try asking them. Try getting them to do an interview. Yes, maybe they will come on Newsnight, or the Today programme, and explain what their rationale is for tolerating a major bank being run like this and voting for its bosses to be handed repeated large bonuses. Good luck and dream on.
In the meantime, it seems the British establishment has had enough of the management of Barclays. The regulators have woken up and so have the politicians.
George Osborne's statement to the commons on Thursday contained this deadly passage:
"As far as the Chief Executive of Barclays is concerned, he has some very serious questions to answer today. What did he know and when did he know it? Who in the Barclays management was involved and who therefore should pay the price? It is quite right that the Treasury Select Committee has asked him to appear urgently to account for himself and for his bank."
With these words Osborne has signalled the close of a period in which Barclays was tolerated as the "troubled survivor" of 2008; the one British bank not cushioned by global size and reach (as with HSBC and Standard Chartered) nor by direct government ownership (as with RBS, and Lloyds Group).
For four years Barclays was cut some slack.
I do not read very much slack in the Osborne statement; not for Diamond and not for the company's chairman, Marcus Agius, who numbers among his many other laurels, the post of Senior Independent Director at the BBC.