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“Culture of Cynical Entitlement”

That is how the chairman of the British Financial Services Authority described the environment of the big banks setting interest rates.  In particular, he was talking about the current scandal involving the London Inter-Bank Offered Rate or LIBOR.  This is an important scandal because the interest rate on countless home mortgages, credit cards, and virtually all commercial loans change according to LIBOR.

At this point, it is not clear whether they pushed the rate higher than it should have been, which would hurt borrowers, or keep it lower, which would hurt lenders.  However, it is clear that the truth was not as important as manipulating their individual incentive plans to maximize their “entitlement-bonus.”

If the borrower paid too little, the lender is entitled to more.  If the borrower paid too much much, the borrower is entitled to a refund.  Now, who is going to audit millions of home mortgages, credit cards, and commercial loans to figure out who owes whom how much?  Do you think banks or plaintiff attorneys will just shrug their shoulders and do nothing?  If you think the robo-signing of thousands of mortgage documents was a paperwork snafu of epic proportions, this interest-rate manipulation will easily eclipse that.  It could cost billions to clean up the paperwork!

Bob Diamond was CEO of the huge international Barclays Bank, which is at the center of the scandal.  At the urging of the British Chancellor of the Exchequer or Treasury Secretary, Diamond resigned this morning. I’m confident he will walk away with many millions of both English pounds and American dollars.  But, assuming he approved this scandalous manipulation, shouldn’t the money be “clawed-back” and Diamond placed in prison, along with whomever else was involved?

But, the take-away for me is the reminder that people will chance the destruction of their company, the jobs of their co-workers, and sacrifice their own honor by intentionally confusing the lives of millions.  They just did what their incentive plan pays them to do.  There is indeed a “culture of cynical entitlement” on Wall Street!  We saw it at Bear Stearns, Lehman Brothers, and many other places.  Unfortunately, we WILL see it again.  However, we will see less of it — IF we start demanding real punishment, instead of mere firings and a little public embarrassment.