Barclays' Bid-Rigging Deja Vu

Gutfreund (who no one ever described as "kind") was axed, stripped of compensation, and agreed to a fine and to never run a Wall Street firm again. Warren Buffett stepped in as a white knight, Citigroup took over Salomon and then ... well, basically, nothing. The whole thing was pretty much forgotten. That's probably the most important aspect of the outcome -- that everybody forgot about it.

We haven't quite gotten to the point that Barclays is about to be swallowed up by anybody, and that is the crux of the problem. It may be too big to be swallowed up by anybody. It is certainly amply big enough -- and trusted enough by the British authorities -- that with the cooperation of other major banks, it was able to rig the LIBOR.

At Barclays, the MacGuffin of the scheme was a benchmark rate, not a Treasury instrument. Instead of the two-year note, the traders at Barclays manipulated the London interbank offered rate. That is far more consequential to the markets than the two-year note, because it is the benchmark in setting the price of gazillion bucks worth of derivatives and financial products, ranging from toxic-waste financial sludge to adjustable-rate mortgages. In the Salomon scandal, the only people directly hurt were a handful of traders and hedge funds who were short two-year Treasuries. At Barclays, the list of victims spans the globe. Already the lawsuits are flying.

Financial scandals follow a kind of implicit script, and all is going according to that elaborate kabuki so far -- in both the things that are going to happen and, more importantly, the things that aren't going to happen. After a few weeks of initial legal wrangling -- the lawsuits and investigations commenced on both sides of the Atlantic, which was Stage One of the scandal, on Monday and Tuesday we had Stage Two, the Ceremonial Head-Choppings. First there was the resignation of Barclays PLC Chairman Marcus Agius and, a day later, CEO Bob Diamond.