Libor, Lies and Labour: what comes after the Diamond geezer?

It was certainly Diamond but it never looked like being a golden moment. The performance of the ex-chief executive of Barclays provided us with little new concrete information about the way his former colleagues attempted to rig Libor. Rather, it simply set the stage for the next phase of this remarkable scandal: a three-way battle between Labour, the Conservatives and the Bank of England.

Bob Diamond’s  three-hour testimony, with repeated condemnations of his traders’ “reprehensible” behaviour, was a masterclass in blocking that immediately earned comparisons to the remorselessly defensive batting style of Yorkshireman Geoffrey Boycott.

Where he came up short, however, was in his effort to prove particular figures in Gordon Brown’s government knew or tacitly encouraged the rigging of the interbank lending rate. Claims that “senior people” were in the know – an apparent reference to advisor Shriti Vadera and ex-City minister Lord Myners – were entirely short on detail and were dismissed by the pair immediately.

Neither this, nor George Osborne’s unsubstantiated claim that Ed Balls was “clearly involved” in pressurising banks to manipulate Libor, which the shadow chancellor vehemently denied have really hurt Labour. Far from it, and the more the Chancellor continues with a flurry of insults the more he is reduced to the role of a pale-faced  artisan attack dog.

Instead, Labour is calling for a judge-led inquiry and must consider how the Libor system can be reformed.

First, it should outline how the Treasury could regulate Libor. Until now the rate has been co-ordinated by the British Bankers’ Association, a legacy of the explosion in the market for interest rate swaps in the 1980s. Now, however, when the market for derivatives has reached an eye-watering $350 trillion – and a banker’s word is no longer his bond – it looks hopelessly outdated to base the rate on banks’ estimates of their borrowing costs rather than the actual figures.

Secondly, Labour must begin to describe the framework for supervising the banks if it is elected in 2015. The abolition of the tripartite system creates an even more complex regulatory architecture, with an alphabet soup of the FPC, the FCA, the MPC, the PRA and, of course, the Bank of England. Labour cannot justify another wholesale shake-up but clearly the Osborne system will have to be simplified into something that is simpler as well as being tougher on the City than the regimes devised by either  this government or the previous one.

It will also be vital to provide more checks and balances on the empowered Bank governor, whether that is Mervyn King, who steps down next summer, or his replacement. Despite being far too slow to tackle the problems of struggling banks in the run-up to the crisis, and to limit their risk-taking, King has been handed greater powers. Similarly, the sudden resignation of Diamond this week is a return to the days when the governor could move markets with a “raise of his eyebrows”.

In short, the cleansing process triggered  by the Libor scandal has only just begun. It is certain that more major British lenders will be fined, although whether more chief executives are forced to quit should depend on the extent of their banks’ misconduct, and when it occurred.

Now, however, the fallout presents an opportunity for Labour to expose the true colours of the current frontbench Tories: a group of impulsive reactionaries whose claim to be strategists is undermined by the cocktail of incompetence, confusion and panic with which they try to run the financial system.