One thing that unites the Tea Party and Occupy move­ments is a hatred of the chi­canery that dragged the world into finan­cial cri­sis start­ing in late 2007.

Anger unites these oth­er­wise dis­parate move­ments. Anger over the world­wide finan­cial cri­sis, huge com­pen­sa­tion pack­ages paid to those who failed to exer­cise fidu­ciary restraint, and the sub­se­quent $700 bil­lion Trou­bled Assets Relief Plan (TARP) bailout of banks deemed “too big to fail”.

In 1913 Europe, a series of treaty alliances amongst unsta­ble par­ties ensured that once a match was set, all hell would break loose — and did. The match was the June 28, 1914, assas­si­na­tion of Arch­duke Fer­di­nand in Sara­jevo. A month later, the Guns of August were mow­ing down young men worldwide.

Ninety-​​eight years later, almost to the day, a spark may have been struck, the spark which lights the hydrogen-​​filled diri­gi­ble of the finan­cial cri­sis’ bad actors.

It’s all about LIBOR, and a eight-​​hundred-​​trillion dol­lar LIBOR pain.

For­mer head of Bar­clays Cap­i­tal Bob Dia­mond. Source: Sky News.

LIBOR is an acronym for the Lon­don Inter-​​Bank Offered Rate. Each day, 18 banks in the City of Lon­don (a metaphor­i­cal place roughly equiv­a­lent to New York’s Wall Street) are polled: “at 11 am, what rate would your bank set for…?” For exam­ple, a key indi­ca­tor is the “three month dol­lar LIBOR”, which is a con­sen­sus num­ber for what the panel would pay at 11 am on that day to bor­row dol­lars for three months.

The LIBOR is cal­cu­lated by drop­ping the top four fig­ures, the bot­tom four fig­ures, and aver­ag­ing the remain­ing 10.

If this reminds you of some­thing, it should. It’s rem­i­nis­cent of how fig­ure skat­ing used to be judged, before the sys­tem changed in the 2002 scan­dal. As the Cana­dian pair found, the appar­ent trans­parency and sim­plic­ity of the sys­tem also makes it easy for a sin­gle bad actor, or mul­ti­ple bad actors act­ing in con­cert, to “game” the scor­ing. Bar­clays Bank, a 300 year old Lon­don bank, did exactly that.

While the United States was cel­e­brat­ing the 236th anniver­sary of the date on which the Dec­la­ra­tion of Inde­pen­dence may or may not have been signed, the for­mer head of Bar­clays Cap­i­tal, Bob Dia­mond, tes­ti­fied in front of a Par­lia­men­tary com­mis­sion that was under­stand­ably hos­tile to him. The day before, July 3, 2012, Dia­mond had resigned.

In a game of Prisoner’s Dilemma, Bar­clays had decided to come clean and rat out its part­ners in crime, in the hopes of min­i­miz­ing their pub­lic rela­tions losses and legal liability.

The LIBOR rate is impor­tant because an esti­mated $800 tril­lion in loans — car loans, con­sumer loans, mort­gages, and many, many oth­ers — have an inter­est rate which is pegged to the LIBOR. (For com­par­i­son, the US Gross Domes­tic Prod­uct is about $15 tril­lion per year.)

Dia­mond was orig­i­nally slated to get over £20 mil­lion ($30 mil­lion) as a nice going-​​away gift — after admit­ting ille­gal acts to reg­u­la­tors — but that deal has report­edly been cut to “only” £2 mil­lion ($3 mil­lion). I’d like to get three mil­lion smack­ers for auger­ing my company’s plane into the ground while smok­ing an ille­gal substance.

Bar­clays did two bad things.

First, in set­tle­ment agree­ments with the UK’s Finan­cial Ser­vices Author­ity and the US Depart­ment of Jus­tice, Bar­clays admit­ted to manip­u­lat­ing the LIBOR rate on hun­dreds of occa­sions. For exam­ple, one trader wrote in his diary, “Ask for high 6M fix,” sort of like a reminder note to rob a bank today. Another wrote a col­league: “Dude. I owe you big time! Come over one day after work and I’m open­ing a bot­tle of Bollinger.”

Offer­ing a weak defense in his res­ig­na­tion let­ter, Dia­mond said:

But we must help our cus­tomers and clients recog­nise that on the major­ity of days, no requests were made at all.

Or, in other words, “on a major­ity of days, Bon­nie and Clyde did not rob banks.”

It is impor­tant to bear in mind that this behav­iour stopped nearly three years ago.

As did the public’s faith in the bank­ing sys­tem. By 2009, we’d all agree the dam­age had been done.

The sec­ond bad thing is much more com­pli­cated and messy but much more seri­ous in terms of its finan­cial impact. Bar­clays, and many other banks, were shav­ing 30 to 40 basis points (0.3 to 0.4 per­cent) off their stated rates, to hide just how bad things had got­ten for them. Recall that as the finan­cial sys­tem crashed, credit became almost impos­si­ble to get. If a bank like Bar­clays revealed just how much they had jacked up their loan rates, they would have appeared as though they were in trou­ble (which they were). There­fore, Bar­clays and other LIBOR banks had strong incen­tive to low­ball their estimates.

This activ­ity — which may have been actively encour­aged or con­doned by British author­i­ties jus­ti­fi­ably wor­ried about the public’s con­fi­dence in the bank­ing sys­tem — exposes Bar­clays to bil­lions in legal liability.

Worse for these bank rob­bers, how­ever, is that it might just be spark that lights the judi­cial Hin­den­burg on fire. Because unlike the pre­vi­ous scan­dals — hous­ing bub­bles and credit-​​default swaps and toxic assets and the like — this story has a clear, eas­ily explained nar­ra­tive. I just laid out the basics in a blog post. Bar­clays has already admit­ted wrong­do­ing. Con­sumers were directly harmed in ways that con­sumer mem­bers of a jury could eas­ily under­stand, even with lit­tle finan­cial knowledge.

Bet­ter yet, Bob Dia­mond sounds a lot like Jamie Dimon, and Bar­clays Cap­i­tal has a cer­tain asso­nance with Bain Capital.

This scan­dal, when it hits Amer­ica, may just be the cat­a­lyst for a round of finger-​​pointing and a legal sys­tem China Syn­drome. I pre­dict a vir­tual, if not a real, tar-​​and-​​feathering of key financiers.

The com­plex­ity of the Enron dis­as­ter was too much for most to under­stand until they obvi­ously and openly manip­u­lated the price of nat­ural gas. My monthly gas bill went from about $100 to $400. For me, what the Enron traders did in 2001 was exactly the same as a rob­ber stick­ing a gun in my ribs at the ATM and tak­ing $300 from me, except they robbed 100 mil­lion of us for sev­eral months in a row. Con­sumers can under­stand that, just like they can under­stand their mort­gage rate being manip­u­lated by Lon­don traders.

Per­haps Dia­mond and his swindler bud­dies will be sen­tenced to hard LIBOR.

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