Hardly had the boyish visage of JPMorgan Chase’s Jamie Dimon quit CNN screens than it was succeeded by that of Bob Diamond, former chief executive of Barclays, accused of masterminding the greatest financial scandal in the history of Britain. Columnists shook with rage at the “reeking cesspool” being disclosed—disclosed, mind you, four long years after the Wall Street Journal broke the story that the Libor was being fixed. Libor, which stands for “London interbank offered rate,” is supposed to be based on the average rate of interest banks charge to borrow from one another. The rate is set every morning by a panel of banks. Each bank “submits” the rates at which it believes it can borrow from the collective money pool, from overnight to twelve months.

Libor is the benchmark for investments all over the world—the Financial Times estimates that $350 trillion worth of contracts have been pegged to it. It is also considered a barometer of a bank’s health. Just as customers with bad credit records have to pay higher interest rates, banks deemed in financial distress have to pay more to borrow. In October 2008, a doomsday month for the world banking industry, it looked like Barclays was next in line for a rescue after taxpayers bailed out the Royal Bank of Scotland and Lloyds/HBOS on October 13. One big warning flare was that beleaguered Barclays could borrow from the common money pool only at a very high rate of interest. The answer was to fix the rate, with Barclays traders secretly winching it down. It was all completely illegal.

Next thing we knew, there was Diamond being reprimanded by a select committee of the House of Commons for being nothing better than a common thief. But then into the hurly-burly suddenly intruded a new actor, actually one in the form of a savior: Paul Tucker, deputy governor of the Bank of England. It turned out that Diamond and Tucker had had a conversation of considerable moment, one prudently recorded by Barclays, on October 29, 2008.

Diamond said Tucker had relayed concerns from “senior Whitehall figures” that Barclays’s Libor was consistently higher than that of other banks. Tucker is alleged to have conveyed the view from Westminster that the bank’s rate did not “always need to appear as high as it had recently.” In other words, Westminster wanted Barclays to massage its rate to a lower level.

But all with full deniability. According to Barclays, “Bob Diamond did not believe he received an instruction from Paul Tucker or that he gave an instruction to [former top Barclays deputy] Jerry del Missier. However, Jerry del Missier concluded that an instruction had been passed down from the Bank of England not to keep Libors so high and he therefore passed down a direction to that effect to the submitters.”

Barclays said there was no allegation by the authorities that this instruction was intended to manipulate the Libor. And when he was questioned by Tory MP David Ruffley on July 9, Tucker testified that “a bell did not go off in my head” that banks were lowering their Libor submissions.

Marvelous: the join between civil society and state was tactfully seamless, with deniability all round.

So first there are the “senior Whitehall figures” (one turned out to be Cabinet Secretary Sir Jeremy Heywood)—i.e., the permanent government running Britain. When a senior Whitehall figure urges the commission of a serious crime, he merely murmurs that the bank’s Libor did not “always need to appear as high as it had recently.” There then follows a flurry of talk about misunderstandings but, Lord save us, certainly not an order to fix the Libor. Then, unmistakably, there is a huge plunge in Barclays’s rate. The government’s concern—that Barclays might appear to be on the brink—is averted.

But we live in a capitalist world, duly furnished with its rewards and penalties. Barclays has agreed to a $450 million settlement, and Diamond and del Missier have resigned. On his way out the door, Diamond said he’d been promised £18 million ($28 million) as a golden handshake. The standing committee had a good jeer, but Diamond stuck to his guns, and there the matter rested until July 10, when Barclays announced that Diamond will forfeit up to £20 million ($30 million) in bonuses and incentives but will retain one year’s salary, pension and other benefits worth £2 million ($3 million).

Of course, there have been furious calls for further punishment and reform. Labour leader Ed Miliband says “we should break the dominance of the big five banks…and strike off those whose conduct lets this country down and prosecute those who break the law.” He also wants to increase competition by forcing the big banks to sell off up to 1,000 of their branches. In the current culture of rabid criminality in the banking system, that would surely be unwise, unleashing 1,000 small-time banksters.

People calling for banking reform on either side of the 
Atlantic are underestimating the problems of enforcement. A writer on the financial news blog Zero Hedge recently 
remarked that “the Libor scandal seems to be waking people up to manipulation and fraud by the big banks.” Of course, there are tools at the ready: sanctions, tribunals, a ban for life for crooked traders. But Libor was meant to be the prime glittering advertisement for the free market. Now it turns out that the whole thing is a fix—a grimy hand all too visible. It’s like the spy in Conrad’s Secret Agent vowing to destroy the first meridian.

Is it possible to reform the banking system? There are the usual nostrums—tighter regulations, savage penalties for misbehavior, a ban from financial markets for life. But I have to say I’m dubious. I think the system will collapse, but not through our agency.