• Libor Now On Everyone’s Lips
• Bring Back Glass-Steagall
• Traders Are The Ruin Of Retail Banking

Terry Smith, the straight-talking Chief Executive of one of the world’s largest inter-dealer money brokers, Tullett Prebon – and as such, a man whom forex traders everywhere will acknowledge as one of the most experienced market watchers around – has been speaking about the recent Libor rate-rigging revelation. Writing in the Guardian this weekend in response to the Barclays debacle, Smith (pictured) said the scandal shows again that investment and retail banks must be separated. “Ring-fencing isn't enough.”

The reaction of the British Bankers' Association to the revelation that Barclays traders had been manipulating the Libor interest rates – they say they were "shocked" – is reminiscent of the scene in the movie Casablanca, in which – as Smith reminds us – “the gendarme Captain Renault closes down Rick's gambling joint and says ‘I'm shocked, shocked to find that gambling is going on in here!’ while simultaneously pocketing his winnings.”

Smith argues that if the BBA had been genuinely unaware that manipulation of Libor was going on, then its officers need to get out more. “Its assertion looks doubly ridiculous given that it shares a chairman with Barclays,” he says, “and will look increasingly unbelievable if, as seems likely, more banks are found to have engaged in this practice and other benchmark rates are found to have been rigged.”

A great banker, the late Sir Brian Pitman, once said that most banks serve their employees well, but few serve their customers or shareholders. There was never any doubt that he was right about this, as he was about most things. But what conclusions should we draw from this latest example?

“First,” says Smith, referring to his article in an an entry on his web blog named 'if you put a fox in charge of a hen coop don’t be surprised by the outcome', “the arguments against separating retail and investment banks were always thin. Now they are surely unanswerable. It is quite clear that whenever we allow investment bank traders to operate alongside retail bank operations which are central to the economy's essential functions of credit creation and payment systems, the traders will overwhelm the retail bankers and the results will be damaging to the vital retail banking operations. We saw this in the causes of the credit crunch when the investment bankers devised an alphabet soup of toxic products – CDOs, CLOs, CDOs-squared – and sold them to customers of the banks. We have seen it again with the staff taking part in the Libor setting suborned by their traders.”