London risks losing its status as the world's top financialcenter as the $360 trillion interest-rate fixing probe follows aseries of market abuses by banks that eroded trust in a cityalready shrinking faster than rivals.

JPMorgan Chase & Co.'s trading loss of at least $2 billion,the alleged $2.3 billion fraud at UBS AG and the investigation ofat least a dozen banks including Barclays Plc for rigging globalinterest rates all happened in London in the last year. The effectis taking a toll on the capital of a country enduring its firstdouble-dip recession since the 1970s, which fired morefinancial-services workers than any other country in 2011 and againthis year.

“My heart sinks every time there is a scandal and theperpetrators are in London, even if it is not always the U.K.'sresponsibility, it is under our noses,” Sharon Bowles, chairwomanof the European Parliament's economic and monetary affairscommittee, said in an interview. “There is an effect on the U.K.'sreputation, and it reinforces the view that even after all theapologies there is much to do.”

London, ranked as the world's number one financial center byresearch firm Z/Yen Group Ltd., was where American InternationalGroup Inc. and Lehman Brothers Holdings Inc. booked transactionsthat helped lead to their downfall. This week saw Bank of Englandand U.K. government officials tied to the interest-rate fixingscandal that cost Robert Diamond, London's best-known banker, hisjob at Barclays. With the European debt crisis on its doorstep,London now faces calls to cull its bonus culture, rein inrisk-taking and beef up a light- touch regulatory system thatfueled a decade-long boom.

The danger for London is that Europe is preparing to set up itsown regulator for banks, which may exclude the U.K. or disadvantagefirms based in the city. Domestically, the industry is losinglongstanding political support from both Conservative and Labourparties — as well as the public.

Home to about 250 foreign banks, London is the world's biggestcenter for foreign-exchange trading and cross-border bank lendingand trades $1.4 trillion of interest derivatives daily, accordingto the Bank for International Settlements. Financial services arethe U.K.'s largest export and pays 12 percent of the country's taxreceipts.

“It seems to be that every big trading disaster happens inLondon, and I would like to know why,” Representative CarolynMaloney, a New York Democrat, said at a June 19 U.S. HouseFinancial Services Committee hearing into the JPMorgan's loss andthe so-called London Whale trader.

AIG, Lehman Brothers and Bear Stearns & Co. all traded swapsin London that led to their bankruptcies or bailouts, Gary Gensler,chairman of the Commodity Futures Trading Commission, which ispushing the Libor investigation, said at the hearing.

“I think in the JPMorgan chief investment office matter, it'sreally a stark reminder about how in derivatives trades bookedoffshore, risk can be brought back here,” Gensler said in atelephone interview yesterday. “And yes, they were booked inLondon, specifically in the branch of JPMorgan Chase's bank, andthose risks are very much a part of the bank here.”

Bank of England Governor Mervyn King said change is needed.

“Everyone now understands that something went very wrong withthe U.K. banking industry,” he said at a news conference in Londonon June 29. “From excessive levels of compensation, to shoddytreatment of customers, to a deceitful manipulation of one of themost important interest rates, we can see that we need a realchange in the culture of the industry.”

Expensive Bailout

The U.K. economy has suffered from losses made in itsfinancial-services industry. Of the country's nine largest banks,four were nationalized or forced to take state aid during thefinancial crisis, costing the country more money than any otherproject in history outside of world wars. The government isimposing the biggest budget cuts since the 1945, and unemploymentis at 8.2 percent.

Barclays, having avoided a bailout along with HSBC Holdings Plcand Standard Chartered Plc, last week admitted manipulating Liborand will pay a record $451 million fine.

U.K. lawmakers from the country's two main political partiesunited in their condemnation of Diamond's failure to prevent hisbank's manipulation of Libor at a Treasury Select Committee hearingin London on July 4.

Diamond, who was Barclays's chief executive officer until July3, ran a “rotten, thieving bank,” John Mann of Labour said at acommittee hearing a day later, while Conservative Andrea Leadsomaccused him of living in a “parallel universe.”

Diamond, 60, apologized for his bank's actions and described thebehavior of “a small number” of traders as “reprehensible” at thehearing. The Massachusetts-born banker stepped down after earningabout 120 million pounds ($186 million) since joining the board in2005, according to proxy voting agency Manifest InformationServices Ltd.

The market abuses come four years after the financial crisis in2008, in which London played a key role. AIG's financial-productsdivision, which insured subprime mortgage bonds, was based in thecity's Mayfair district. Lehman booked transactions to move debtoff its balance sheet through its London office in Canary Wharf,according to its bankruptcy examiner Anton Valukas. Bear Stearnsmade similar trades in London, Gensler said.

'Quite Arrogant'

The Libor settlement followed earlier mis-steps with customers.U.K. banks including Barclays, Royal Bank of Scotland Group Plc andLloyds Banking Group Plc have set aside 6.4 billion pounds incompensation to customers who were mis-sold insurance for loans.The banks last week agreed to repay small and medium-sizedbusinesses improperly sold interest-rate derivatives following aprobe by the U.K. financial regulator.

Diamond and JPMorgan CEO Jamie Dimon “are known to be quitearrogant, and to have lectured politicians for not understandingfinance,” said Philippe Lamberts, a Belgian lawmaker in theEuropean Parliament's economic and monetary affairs committee.“Well, I won't take lectures from these kinds of people any more.If there's one thing they've demonstrated it's their inability torun their businesses.”

The Bank of England, which will take on additionalresponsibility for regulation as well as being the country'scentral bank, was implicated in the Libor fixing scandal this weekwhen Barclays published an e-mail written by Diamond in 2008. PaulTucker, an official at the bank, told Diamond in an October 2008phone call the government perceived Barclays's Libor rates to be“high,” the e-mail said.

Tucker didn't tell Barclays to reduce its submissions to theLibor rate-setting system, Diamond said July 4. The Bank of Englanddeclined to comment. Tucker has asked to testify in Parliament assoon as possible.

Eighteen banks are surveyed to determine Libor, a benchmark formore than $360 trillion of financial products globally. It is setby averaging out submissions in a poll of banks, who are asked howmuch it would cost them to borrow from each other for differentperiods of time.

U.K. Prime Minister David Cameron is dissolving the FinancialServices Authority, which was created by Tony Blair's Labourgovernment in 1997, and replacing it with two regulators run by theBank of England. The Labour government's commitment to light-touchregulation helped fuel the financial-services bubble, he hassaid.

Corruption Index

“In New York they have attorneys general who are dead keen onprosecuting people,” said Paul Moore, who was fired from his job ashead of risk for HBOS Plc for warning the bank's bosses that itsgrowth plans could threaten its stability. HBOS almost collapsed in2008 before it was bought by Lloyds.

“We never prosecute” in London, Moore said. “You can be a rioterand steal a water bottle and get put in prison, but if you are adirector of a company that systematically mis-sellspayment-protection insurance to people you can monetize it.”

The latest revelations may influence the U.K.'s ranking in theCorruption Perceptions Index, according to Chandu Krishnan,executive director at the U.K. arm of Transparency International,which produces the measure. The U.K. was the world's 16th leastcorrupt nation in 2011, behind New Zealand at number one and aheadof the U.S. at number 22.

“It seems we haven't learned enough from the problems in 2007and 2008,” he said. “It's hurting London's reputation as afinancial center.”

The series of scandals haven't yet impacted London's ranking asthe world's top financial center ahead of New York, according toMark Yeandle, senior consultant at Z/Yen Group, which compiles thelist.

“The events could easily have taken place elsewhere and New Yorkhas not been free of scandal itself,” he said. “What could affectthe perception of London's competitiveness is how the regulatorsand legal authorities here deal with the guilty parties.”

Banks based in the city, which is hosting the Olympic Games thismonth, have fired 10,000 workers this year, almost half of theglobal total, according to data compiled by Bloomberg. U.K. bankscut almost a third of the 200,000 employees who lost their jobslast year.

“There's a mood of significant introspection,” said MichaelKirkwood, 65, a board member of U.K. Financial Investments Ltd.,which oversees the government's stake in RBS and Lloyds and isformer U.K. chairman of Citigroup Inc. “People no longer hold theirhead up high when they have to say they are a banker.”

Banker Bonuses

The public aren't sympathetic to the bankers' plight.

“I understand talented people deserve bonuses,” said WalterPhilippson, 47, who works as a courier in London's financialdistrict. “But we've seen that not everyone in the City is thatgood. Some simply don't deserve it.”

Barclays's investment banking unit paid employees an average of203,750 pounds each in 2011, filings show. The figure includessalary, bonuses and pensions. That's almost eight times the averageU.K. salary of 26,000 pounds, according to the Office for NationalStatistics.

“The City is ruled by the elites, by people like Bob Diamond,”said Rose Wynes, 53, a social worker and mother of five inWestminster in Central London. “We're being tricked, conned andplayed by them. We're sheep.”

To improve the city's ethos of making a quick profit at theexpense of customers, investors and national economies, the U.K.government needs to insulate retail banking from tradingactivities, regulate derivatives and encourage banks to more evenlydistribute profits between employees and shareholders, Kirkwoodsaid.

More important than new rules is an attempt to change Londonbankers' attitudes, according to Moore. “There's a culture, notjust in the investment banks, but also the retail banks, that needsto end,” he said. “The boil is rancid, and we need to lanceit.”

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