Amid mounting calls for the bankers who rigged Libor to be jailed, the Greek financier widely credited with inventing the benchmark interest rate has said that without the key ingredients on which it was built – honesty and trust – the formula was doomed to fail.
Speaking to the Guardian, Minos Zombanakis described how the London Interbank Offered Rate, which underpins $300tn of loans and financial transactions ranging from complex derivatives to ordinary mortgages, was born into a very different world. Manipulating the system, or indeed any unscrupulous behaviour, would have been unthinkable, Zombanakis says, because the system was based not only on the probity of men in bowler hats and pinstripe suits but on something more important still: an unwritten code of conduct inspired entirely by fair play.
"It was a matter of behaviour," the former banker said. "You always worked in the market with the assumption that you were dealing with gentlemen, and you assumed that people acted honourably because they couldn't afford to act otherwise," he said.
"The whole international banking system was based on the fact that people trusted each other," he insisted, adding that no bank would have wanted to cut itself out of the loan market by sullying its reputation. "Their primary goal was to secure the loan," he said. "If they quoted unreasonable rates, they might lose the opportunity to work again."
Long seen as the father of major syndicated finance, in which groups of banks provide one loan, Zombanakis has watched Libor's descent into disrepute and scandal with incredulity. "Banks that manipulate the rate deserve, absolutely, to be fined," he said. "They are violating their own dignity."
When Zombanakis proposed his innovation, in the 1960s, the rate was based on little more than a loan agreement, which participating banks signed.
"We were more or less going into new territory, and we had to create certain things that were acceptable to all the lenders," the octogenarian recalled. "One of those key things was the rate of interest. I remember well calling each of the reference banks two days before the agreement had to be signed. We all knew what the various rates of interest were, and rounding them up to within a margin of one eighth of one per cent we would come to a realistic rate for both the lender and borrower."
The first time the benchmark was used in a single syndicated loan was in 1969, when Zombanakis, who had just set up Manufacturers Hanover bank in London, was approached by the vice-governor of Iran's Bank Markazi to raise $80m (£49m, at today's rate of exchange).
Between 20 and 30 banks participated in the process. Most had a presence in the Middle East, and among them were the Ottoman Bank, Grindlays, the British Bank of the Middle East, Citibank and Chase Manhattan. At that time, fixed-loan rates were the standard business practice, but the Libor-linked loan was oversubscribed, and an immediate success.
"It was celebrated with champagne and Iranian caviar at MHL's Mayfair offices and was widely reported in the financial press as a groundbreaking event," writes David Lascelles in his recently published biography of Zombanakis. "The Economist described it as 'very cunning'. Even allowing for the hype, it was a key moment."
The innovation would lead not only to the syndicated lending market getting off the ground, but ultimately to the mammoth interest rate derivatives market and London's birth as the prime locale for hundreds of international banks.
Zombanakis, a rags-to-riches success story who talked his way into Harvard after an impoverished childhood in Crete, acknowledges that the world of international finance has been transformed in the intervening years.
"Things have changed. Back then, money was hard to find and expensive to acquire," said the retired banker, now a prominent Greek philanthropist, who spends most of his time in Crete.
Regulators, he says, should have moved faster to stop the rot.
"The market now is very different. Banking institutions and finance houses are so big today. A chairman of a bank has no idea what rates some little guy is going to quote. There is always the danger that some smart aleck will do something to get a bonus."
Undoubtedly Greece's most celebrated banker, Zombanakis blames the country's debt crisis mostly on banking excess: "They were over-lending, pushing money down peoples' throats. And, very simply, today's borrowers can't repay what they borrowed," he said. "Greece is not about to collapse. At some point we are going to come out of it … but it will take time."
There may also be "indirect benefits" to eventually emerge from the country's worst crisis in modern times, he said.
"It's a sad thing to say, but this negative story may be good for Greece. The economy was overheated. It has got to lose some of its steam to support itself, probably at a lower level of activity. It will take between three to five years before the country manages to stabilise itself."
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image: © Elliot Brown