Margareta Pagano: Heads surely have to roll after Barclays scandal

There's a common expression which has all too often been used in banking circles: "If it ain't broke, don't fix it." Well, the latest scandal over the role of Barclays, and other UK banks, in the latest Libor fixing conspiracy has demonstrated once and for all that the banking system is broken, if not defunct.

It's not just that the evidence of Libor rigging has revealed another lack of regulatory control, but more fundamentally, a deep-rooted moral collapse in the behaviour of bankers; from the money-market traders on the dealing floors to the suited executives in the boardroom. Libor has become Lieboard, or as one trader put it: the inter-bank offered rate now stands for London's International Band of Racketeers.

Barclays is taking the rap today, but you can be sure that the manipulation involved in setting Libor was just as prevalent at the UK's other banks – we know it was practised at Royal Bank of Scotland and Lloyds Bank – because that is how the market operates.

The challenge now for the Government, the regulators and bank investors is to ensure that they do now "fix it" – that they make careful decisions about the right response to the revelations that Barclays lied, cheated and misled the markets for at least four years to make profits for itself, and then acted to suppress market worries about its own position at the height of the financial crash.

Indeed, when the historians come to write their accounts of the financial crash, there's no doubt that this conspiracy to distort interest rates will be seen as the most devastating scandal to be unearthed over the past three decades or so.

In so many ways, it will be the Government's response that will be the even greater defining moment and which will be judged most acutely by the historians.

Unusually, politicians across the spectrum do seem to get the magnitude; the first reactions from David Cameron and George Osborne show they understand the true extent of what has happened, and certainly that if they let this go, the already simmering public anger towards the bankers could turn violently against them too.

It is not for Mr Cameron or Mr Osborne to tell Barclays that its chief executive, Bob Diamond, and its chairman, Marcus Agius, who is also chairman of the British Bankers' Association, should step down. That is for the investors to decide.

But implicitly both seemed to suggest heads should roll; and from what one hears, there is not much love lost between the Treasury and Barclays. It's been said that the Treasury pushed for HM Revenue & Customs to release when it did its decision to fine Barclays £500m over a tax settlement as punishment for paying such huge bonuses to Mr Diamond and his colleagues earlier this year.

With hindsight, it is all the more incredible that the Barclays board decided to pay any bonuses to senior executives at all as it knew – and was helping with – the investigation being carried out by the US regulator, the CFTC, and the Financial Services Authority, for the past two years. We now know, too, that there was a whistleblower at Barclays who went public with his warning four years ago.

MPs will get the chance to find out more about who knew what, and when, as early as this week. The Treasury select committee, which meets privately on Tuesday, is hoping to ask Mr Agius and Mr Diamond to appear this Thursday.

Both have denied any knowledge, yet the chief executive, who has a fixed-income trading background so will know all about the money-markets, was running Barclays Capital at the time of the fixing.

Some traders claim he would, or should, have known. The CFTC, which imposed the biggest part of the £291m fine on Barclays, also seems to think this came from the top.

Its report is brutally clear about what was discovered, claiming that from the start of the credit crunch in August 2007, all the way through to early 2009, Barclays made "artificially low … submissions" about the interest rate it was being forced to pay to borrow to "protect Barclays' reputation from negative market and media perceptions concerning Barclays' financial condition".

Put another way, Barclays was pretending that it could borrow cheaper than it actually could – to ensure to the outside world, its owners and creditors that all was fine.

The CFTC also said this was done "as a result of instructions from Barclays' senior management".

This rings true, for there is a direct line running up the pyramid from the traders, who had their positions, and their bonuses, to protect, and the more senior management of BarCap, who had their overnight portfolios to protect. So there was a big incentive to manipulate the rate.

Fortuitously, one of the select committee's most tenacious members is Andrea Leadsom, the Conservative MP and ex-Barclays executive. She worked on the collapse of Barings and understands better than most MPs what actually happened.

Like many in the City, she will be asking Mr Diamond whether he knew what was going on at BarCap – and his lieutenants Jerry del Missier and Rich Ricci – and if he didn't, why not as the rigging appears to have been systemic. Turning a blind eye is not a defence.

At present, manipulating the rate is not an explicit crime so it's impossible to know if criminal prosecutions can be brought against individuals at Barclays. However, it is inconceivable that some sort action can't be brought against those involved – many have already been sacked at Barclays and they seem to be dropping like flies at other banks and hedge funds who were complicit in the rigging.

But it's at the top of the money tree that examples also have to be made and that's why Mr Agius and Mr Diamond should resign; the industry must show publicly that its leaders are accountable for its arrogance, if not its moral laxity. It's only by high-profile departures that others in the market will also understand that there are penalties for wrong-doing.

However, Barclays' big investors – including Black Rock, Standard Life and Legal & General, are in two minds about whether they should stay or go. Some say Mr Diamond should stay because the investment bank is so much his creation only he can fix it, particularly at such a vulnerable time. You could argue the reverse too: that it's his go-getting, gung-ho culture that has led to so many scandals, and reputational damage.

Whoever leads Barclays may have even bigger issues to face and that's whether customers – or shareholders – decide to take class action against the bank.

It's impossible to quantify how much Barclays may have cooked the books, and therefore affected the interest rate at which customers have borrowed in mortgages or lost their savings.

If I were one of the UK's banksters, I would be very, very scared; there are people out there who will see this as an opportunity to change the way banking is run, for more competition is the best solution to fixing the system.