Loans’ LIBORs Loused
Original post made by Tom Cushing on Jul 11, 2012
To paraphrase the hapless manager of the Durham Bulls baseball team: "Banking is a simple game; you borrow the money, you pay the money back, and the bank charges you interest on it." Except it's not, as we are beginning to learn. Yet again.
To define terms, the LIBOR ("London InterBank Offered Rate") is the interest rate big banks pay to borrow money that they eventually lend to you. It is set as an average among rates reported from leading banks around the world. The numbers are crunched by the British Bankers' Association. On the borrowing side, a low LIBOR reported by a bank is a sign of its good health, as others are willing to lend to it with little risk of default. It also means that the reporting bank's "derivatives" securities go up in value (you'll have to trust me on that one, lest I lose you completely). On the lending side, however, higher LIBORs mean higher interest rates paid by borrowers.
Indeed, the LIBOR very often determines the interest rate you pay to your bank world-wide, some $750 Trillion dollars of debt transactions are "pegged to" (based on) the LIBOR. That's 750 thousand billions, for those keeping score at home. Your mortgage, student loans, and car payments, to say nothing of business and government debt, are all based on it. So, it's important for each bank and the banking system that it be computed accurately, and honestly.
Except it's not. Barclay's Bank in London has just admitted that for much of the past decade, it has routinely submitted false numbers to fool government regulators on both sides of the pond as to the bank's health, and at the behest of their traders to boost profits in derivatives (low) or lending (high). Further, they claim to know of other leading banks that do the same thing. They have agreed to almost $½ Billion in fines, so far, and their top two officers have resigned. By the way, Barclay's head trader is one Rich Ricci, one of the great names in the annals of business buccaneering (but I digress).
Now, you don't have to manipulate the LIBOR very much to have a big impact on profits. Recall the movie Office Space, where the underlings conspired to rip-off their employer for a million bucks by extracting 1/10 cent from each transaction? It's like that, only writ very, very large. It is bad enough for the economy that between the mid-1980s and 2007, financial-sector earnings made up two-thirds of all the growth in incomes. Finance, after all, moves money around but does not add intrinsic value, or productive jobs we are now learning that the financiers didn't even do it fairly, but by gaming the system.
No less a commentator than Robert Reich has already called this "Wall Street's Scandal of Scandals," so I hope you have some moral outrage left in you. Institutions are busy toting up their losses; the vast number of Benjamins involved nearly defies computation.
Beyond the strict financial damages, it is the gospel truth that our economic system depends on an implicit contract of trust among participants in it. Too many breaches of that covenant, and folks won't participate. Personally, I've withdrawn from the stock market in disgust because I simply can't stand the idea that I'm some billionaire's stooge. The financial system has so far survived my departure, but as these scandals widen and deepen -- and too many others also leave the game -- economic activity just has to suffer, precisely when it needs a good shot in the arm.
Since the repeal of the Glass-Steagall Act that separated lending from trading, the banking sector has become too clever by half, and now we learn that they've been ripping us off in ways we can't easily discern. I yearn for the palpable greed of A Wonderful Life's Mr. Potter or even the version espoused by Gordon Gecko. It's said that you can steal more money with a pen than with a gun that's true in spades if you're armed with a sophisticated trading system, an anything-goes corporate culture, poor oversight (at best) and exceptional ethical flexibility.
One last point: I've often railed in these missives against the 'Citizens United' decision of the US Supreme Court; this is why. The Wall Street lobby has all but gutted the so-called Dodd-Frank Act, intended to improve regulatory oversight in the wake of 2008. You may bet that some significant portion of these ill-gotten gains will find their way to campaign coffers as a tithe to ensure lax regulation, and insure against other financial system reforms. One more reference, from a brilliant 1970s movie whose time has now come: "Woe is us we're in a LOT of Trouble!"
on Jul 16, 2012 at 12:55 pm
Update: As the scandal widens, it appears to draw in Tim Geithner, who knew about the rigging "problem" in 2008 and whose recommendations for a solution were heavily influenced by the banks, themselves. See Huffpost article here: Web Link Yes, yes huffpost is a liberal publication, but in this case that lends credibility to their concern regarding "regulatory capture" (the inmates running the asylum).
on Jul 16, 2012 at 1:35 pm
This scandal shows once again what a poor job the federal government does at protecting the public from crooks.
Even after this govt. incompetence, Tom continues to promote "Big Government" as the solution to America's problems.
This scandal did not arise due to lack of regulatory oversight, as Tom infers. It arose due to SEC lawyers acting more like DMV employees rather than the good cops they should be.
The SEC had the power to help stop this abuse, yet they never did a thing until the Wall Street Journal first broke this story back in 2008. Only then did the SEC start to do their job and open an investigation.
Tom's final point about Citizens United is also off the mark. The central holding of Citizens United is that Congress has no right to limit political speech. There are better ways to fix our broken electoral system besides tampering with the First Amendment.
on Jul 16, 2012 at 6:28 pm
Hi sp: Your argument suggests that because federal regulators weren't doing their jobs during the prior Administration, there should be no regulation? Is that it, sp? Because it's a pretty remarkable non-sequitur â€" can you Imagine the misdeeds that would be done by the organized (read: â€œcolluding") banksters if they knew they didn't have to worry about ANY regulatory oversight?
I agree that the SEC was asleep at the switch during the Bush 2 years, as they were intended to be â€" and to a significant extent they still are ineffective â€" both underfunded and outgunned. The regulators also have had -- and still have -- much too cozy a relationship with those they are supposed to oversee, as Mr Geithner's behavior continues to demonstrate. But that's no argument against regulation, done right. Perhaps in your vision of smaller government, the SEC can be further starved of resources. The agency itself has been around since the 1930s; I don't think I've ever seen anyone call for its abolition, at least until I read your comment.
As to this scandal being around since 2008 â€" the rate-rigging has been going on longer than that â€" but that's not to call it old news, or unimportant â€" indeed, the current issue of The Economist calls it â€œthe financial industry's â€˜Tobacco Moment.'" That's big, and it will be with us for a long time. It is the kind of chicanery that people have â€" and should â€" go to jail for committing. Whether the regulators are up to the challenge, here, in the UK and across the EU, remains to be seen.
Finally, your view of the Citizens United case rests entirely on the equation of â€˜money' with â€˜speech,' which was a novel interpretation when promoted in a prior decision (Buckley, iirc). I am hardly alone in opposing that absurd position, which threatens to entrench monied interests in government to the detriment of actual democracy (and necessary regulation). Money will drown-out the voices of other citizens, whose voices deserve to be heard. It smells of colonial days when only land-owning/white/men were allowed to vote. The unlimited campaign contribution system enabled by Citizens United is much closer to legalized bribery than it is to â€˜expression.'