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On Thursday when our attention was elsewhere we overlooked a huge story from London.

Barclays Bank will pay $453.6 million to settle a long-running probe by the FBI and the U.K. Financial Services Authority (FSA) that proved traders at the bank manipulated interbank lending rates (known as LIBOR).

This doesn't stop in London and is not just another scandal, for several reasons:

1) this isn't about some bizarre financial instrument that no one can understand. LIBOR, as described by The Economist

IT IS among the most important prices in finance. So allegations that LIBOR (the London inter-bank offered rate) has been manipulated are a serious worry. LIBOR is meant to be a measure of banks’ own borrowing costs, and is used as the foundation for a host of other interest rates. Everyone is affected by LIBOR: it influences the payments made on mortgages and personal loans, and those received on investments and pensions.
If you like, think of fiddling LIBOR as analogous to rigging the prices for crude oil.

2) there is no way to blame this one on a few "rogue traders" - the rot goes all the way to the top. Press reports for several years now have noted from time to time that LIBOR was moving in strange ways that suggested manipulation. The boards of directors of the banks cannot have read those reports and thought to themselves "although I oversee a bank, there is no need for me to recommend to my fellow board members that we should look into this".

The chairman of Barclays has just resigned.

3) The corruption of LIBOR proves that the "invisible hand" doesn't regulate the market - it wanks it.

4) the rage coursing through the British press and media over these revelations is palpable.  Previous crises, like the Lehman's collapse, were accompanied by such a huge element of fear over the collapse of the entire system that discussions of individual culpability were swept under the rug. Google your favorite British newspaper and have a look at today's coverage. They are demanding retribution.

5) Given (4), unsurprisingly, British politicians are, for the first time, lining up to say people need to go to jail.

Now, for the "this doesn't stop in London bit": given what Barclays did, their $453.6 million fine isn't all that large. The British press is reporting it got a reduced penalty by (a) agreeing to be the first to admit wrong-doing, and (b) cooperating with the FBI and the FSA to nail other banks guilty of the same thing.

At least 12 banks are involved in LIBOR investigations around the world.  The list includes other British banks, continental European Banks (Duetche Bank, Credit Suiss, USB being the most commonly mentioned), and "several" Wall Street banks. Many commentators assume that eventually every major financial institution will be drawn into the investigation.

We need a cultural change towards both the conduct of bankers and the regulation of banks. This message is, at last, sinking in at the very highest levels. Sir Mervyn King, Governor of the Bank of England:

Everyone now understands that something went very wrong with the U.K. banking industry. From excessive levels of compensation, to shoddy treatment of customers, to a deceitful manipulation of one of the most important interest rates, we can see that we need a real change in the culture of the industry.

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