LONDON BRIEFING:A WEEK ago, most people outside the City of London (and a fair few within the Square Mile) had never heard of the London Interbank Offered Rate (Libor), let alone understood what it was.

Now, as the rate-rigging scandal at Barclays claims the bank’s biggest scalp, chief executive Bob Diamond, it’s joined the ranks of esoteric financial acronyms entering the mainstream, as analysts and financial journalists attempt daily to explain its unique role in the setting of interest rates around the world.

Amid feverish speculation last night, the Bank of England and the last Labour government were dragged into the affair by an email from Diamond to his colleagues. Dated October 29th, 2008, the height of the financial crisis, it gives his version of a conversation with deputy Bank of England governor Paul Tucker, and sets the scene for what could be an explosive appearance by the former Barclays boss at Westminster this afternoon.

It seems longer but it was only a week ago that Barclays was revealed to have engaged in systematic manipulation of Libor, an offence the bank admitted and apologised for. Barclays was slapped with record fines totalling £290 million from the British and US authorities and Diamond together with his three closest colleagues – chief operating officer Jerry del Missier, head of investment banking Rich Ricci and finance director Chris Lucas – said they would forgo their bonuses as a penance.

That was never going to be enough to quell the outrage from politicians and the public at the bank’s behaviour, just the latest and most serious example in a lengthy list of offences that includes widespread mis-selling of payment protection insurance and aggressive tax avoidance operations that cost the treasury millions.

Diamond had been determined to stay on at the bank, despite the growing political storm, vowing to change its culture. The next episode in the drama was to be his appearance today before politicians on the treasury select committee.

But Diamond’s exit became inevitable by close of play on Monday, after the board’s gamble to sacrifice chairman Marcus Agius instead failed to take the heat off the chief executive. A key role in Diamond’s decision to resign was played by Bank of England governor Sir Mervyn King, who is understood to have made it clear to Barclays that Diamond would have to go.

Thus yesterday, at 7.30am, Diamond’s resignation was announced to a stunned City, along with the temporary reinstatement of Agius as chairman. Some seven hours later – reflecting the utter confusion within the bank – came the announcement of the departure of del Missier, just one month after his elevation to the role of chief operating officer.

There have been many extraordinary days during the five years of the global financial crisis but, for sheer drama and confusion, the exceptional events at Barclays yesterday are right up there with the collapse of Lehman Brothers and the run on Northern Rock.

And there’s more to come today, when Diamond submits to his grilling on the rate-rigging scandal by the MPs.

The tone for today has been set by an explosive email from four years ago, sent to Barclays then chief executive John Varley (Diamond at that time headed the investment banking operation) and to del Missier. Released by Barclays last night, it’s Diamond’s record of a conversation he had with Tucker, in which the deputy governor of the central bank reportedly said “it did not always need to be the case” that Barclays’ Libor submissions needed to be so high.

It was the misinterpretation of this email by Diamond’s lieutenant that was behind the lowering of the bank’s Libor submissions, and that led to del Missier’s resignation yesterday.

But the email also refers to “senior figures within Whitehall” (so far unnamed but with former Labour business minister Baroness Shriti Vadera at the centre of speculation) contacting the central bank to express their concern over Barclays’ Libor submissions. That drags the last Labour government firmly into the affair and will be central to Diamond’s questioning later.

Other lines of questioning will undoubtedly include the millions that Diamond will take with him as he walks away from Barclays. He has long been the highest-earning individual at the bank and, since his salary was first disclosed in 2006 when he joined the board, he has amassed more than £100 million in pay and perks.

Estimates of his departure windfall extend to £20 million plus although questions from reporters on just how much Diamond will collect were brushed aside by Barclays in a brief and hastily arranged media conference call yesterday. The politicians may prove tougher inquisitors today.

Fiona Walsh writes for the Guardian newspaper in London