Probe of Libor Scandal Set by British Parliament

London fears taint of scandal will damage its standing as financial center

Westminister and Big Ben. Westminister and Big Ben.

An investigation into the rigging of Libor has been set by the British Parliament as the City of London worries that its reputation as the world’s top financial center has been damaged beyond repair.

Reuters reported Friday that after an acrimonious debate, Parliament voted Thursday to allow a parliamentary, rather than judicial, inquiry. The Labour Party had called for the latter, saying that the public would not view a parliamentary inquiry as having the same impartiality that a judicial review would provide.

Finance Minister George Osborne had accused Labour shadow minister Ed Balls of having “questions to answer” over his time as adviser to the former Labour chancellor. In an interview with political magazine The Spectator, Osborne had not only questioned Ball’s history but also said that individuals working under the previous Labour government were “clearly involved” in the rigging scandal.

An irate Ball challenged Osborne in Parliament, demanding that he provide evidence of his allegations or retract them and apologize. He also called the decision to allow politicians to investigate the Libor case “a very grave error of judgment” by Osborne and Prime Minister David Cameron, according to a Bloomberg report.

“We need the inquiry to be thorough and genuinely cathartic or else we will be here again,” Ball was quoted saying. However, in the end Labour voted to support the inquiry.

The Libor scandal, termed “bad for Britain” by Treasury Committee head Andrew Tyrie, who will lead the investigation, is taking a toll on London, which lately has been the site of numerous financial scandals. The deals that led to the troubles at Lehman Brothers, Bear Stearns and AIG were booked in London, as was the recent staggering loss by the “London Whale” at JPMorgan Chase. So were the unauthorized trades that resulted in a $2.3 billion loss at UBS AG.

“My heart sinks every time there is a scandal and the perpetrators are in London, even if it is not always the U.K.’s responsibility, it is under our noses,” Sharon Bowles said in the report. Bowles, who is chairwoman of the European Parliament’s economic and monetary affairs committee, added. “There is an effect on the U.K.’s reputation, and it reinforces the view that even after all the apologies there is much to do.”

Even though the British Financial Services Authority (FSA) is set to be replaced in 2013 with two separate bodies, the Financial Conduct Authority (FCA) and the Prudential Regulatory Authority, the action may be too late to salvage London’s standing. Europe is setting the stage for its own bank regulator—which could either omit Britain’s banks or leave London-based institutions at a disadvantage.

London houses approximately 250 foreign banks. It is also home to some $1.4 trillion in interest derivatives trades every day, and is second to none in both foreign exchange trading and cross-border bank lending. Britain’s biggest export is financial services and the nation depends on the sector for 12% of taxes paid to the Treasury.

But the sector has spawned some serious problems that have reached far beyond Britain’s borders. Rep. Carolyn Maloney, D-N.Y., was quoted saying at a June 19 hearing of the House Financial Services Committee, “It seems to be that every big trading disaster happens in London, and I would like to know why.”

Her concerns were echoed by Gary Gensler, chairman of the Commodities Futures Trading Commission (CFTC), who said in the report, “I think in the JPMorgan chief investment office matter, it’s really a stark reminder about how in derivatives trades booked offshore, risk can be brought back here.” He added, “And yes, they were booked in London, specifically in the branch of JPMorgan Chase’s bank, and those risks are very much a part of the bank here.”

Barclays’ own ordeal is far from over. After a Moody’s downgrade of its outlook from stable to negative, Standard & Poor’s followed suit on Thursday, saying in a statement, "We see potential for the eventual new CEO to review the current scope of Barclays activities, particularly if that person were an external hire."

In February, Barclays’ board was warned by the British regulator that the culture of the bank needed to change. The loss of three top executives may be a step in the right direction, but in the short term Moody’s regarded it as unsettling, saying in a statement, "Although this could have potentially positive implications over the longer term, the uncertainty surrounding such a change in direction is credit-negative in the short term."

Moody’s had expressed concern over the search for a new CEO at the firm, saying, "The bank could be challenged to replace the three senior staff and in particular find a new CEO who not only has a sufficient understanding of the investment banking business to run Barclays, but also has the credibility and ability to swiftly address the weaknesses that the Libor incident revealed and stakeholders' perceptions of the investment bank."

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