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Town Square

Loans’ LIBORs Loused

Original post made by Tom Cushing on Jul 11, 2012

Mention the term LIBOR in almost any group, and half will assume a speech impediment, a third will change the subject and the remainder will excuse themselves, eyes a-glaze. To combat this problem, I will try to intersperse a few movie references in the material that follow, because this stuff is important.

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!"

Comments

Posted by Tom Cushing, a resident of Alamo
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).


Posted by spcwt, a resident of Danville
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.

Web Link

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.


Posted by Tom Cushing, a resident of Alamo
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: “colluding") 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 “the financial industry's ‘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 ‘money' with ‘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 ‘expression.'


Posted by spcwt, a resident of Danville
on Jul 16, 2012 at 8:18 pm

I am merely saying that federal regulators have done a poor job at protecting us from swindlers like Bernie Madoff, MF Global, Galleon Group, WG Trading, Tom Petters, on and on. My comments are not advocating for less financial regulation. I am expressing my dismay at government incompetence at stopping the bad guys. I am disputing your inference that somehow these scandals are a result of poor regulatory legislation rather than just sloppy work of government employees.

I am also taking a shot at you for your unabashed support of big government to solve America's problems. When it comes to protecting our wallets from crooks, big govt. is obviously failing. Why should we trust them with things like our healthcare?

Finally, could you do everyone a favor and actually read Citizens United? You keep saying it allows "unlimited campaign contributions." That's not true.


Posted by Tom Cushing, a resident of Alamo
on Jul 17, 2012 at 12:56 pm

1 -- the SEC has done a poor job because they were supposed-to, from 2001-2009, because they are still badly under-funded and out-resourced by those they regulate, and because I do not believe this Administration has made financial crime a sufficiently high priority. Frankly, I am astounded that Wall Street is said to hate Mr. Obama so passionately. In my perfect world, quite a few financial execs would already be "breakin' rocks in the hot sun." If regulation is not the answer, then what, exactly would you prescribe, doctor?

2 -- You continue to mince words to minimize the profound impact of Citizens United, but don't mind me -- mind the very hyper-credible and non-partisan opensecrets.org on the subject:

"Corporations, unions and issue advocacy organizations may now spend unlimited amounts of money from their treasuries on independent political expenditures in support of or opposition to a candidate. Learn here how the Supreme Court transformed the campaign finance landscape through Citizens United v. Federal Election Commission -- and how the decision is now affecting U.S. politics."

Per their charts, in the 2010 cycle, for example, nearly $300 million of new money came into the process, 65% for conservative candidates, 30% for liberals and 5% for others. This time, the numbers are far, far higher. And yes, corporations and unions are both newly enabled by CU (both formerly forbidden since 1908), but if you call that a fair-and-balanced fight, then I know where you're getting your news.


Posted by American, a resident of Danville
on Jul 17, 2012 at 2:03 pm

Tom: I think a large problem facing our country is the public school system being forced to teach political correct issues, rather than focusing on teaching key skills, such as critical thinking and objective analysis logic. We are turning out students, voters, and our future leaders, who have absolutely no clue how to objectively analyze an issue and use critical thinking skills.

For example, during the Occupy protests in Walnut Creek, the misguided and misinformed protesters were camped outside Bank of America, because the belief is that banks "are bad and evil", and they are the cause of the growing wealth inequality in our country. However, a block away,was the promised land, The Apple Store, which the ill formed public consider a liberal bastion of "good". Fact is the Apple CEO made over $300 million dollar last year, they outsource most of their labor overseas, and the hardworking employees who are educated and move the products typically make less than $30,000 a year. Al Gore is on the Board of Directors of Apple, so they must be a "good" company, right?

Tom, it is very easy for the liberal media to write non-stop articles attacking banks, insurance companies, oil companies, PG & E, and other companies labeled as "Republican" based companies, while fawning over Apple and other companies labed as "Democrat" based companies.

However, if you really want to help educate our young citizens and future leaders, at least pretend to be objective, and on occasion question companies that are considered liberal, by using critical thinking analysis.

Our country will continue to struggle, until we teach all our citizens how to logically analyze facts,objectively apply data, and not simply spit out politically correct babble.


Posted by spcwt, a resident of Danville
on Jul 17, 2012 at 2:44 pm

Tom,

You say Federal regulators were "supposed to" do a poor job?? What?? Says who? No. They just didn't do their jobs. That's Big Government for you.

Did you read the transcript from 2007 between a federal regulator (Fabiola Ravazzolo) and Barclays Bank? The Barclays guy basically admits that they're engaging in price fixing Libor rates. What does the federal regulator say in response?? "Mm Hmm. Ok. Have a nice weekend." The issue is then dropped for 5 years. What a joke.

As for opensecrets.org's take on Citizens United, they're saying what I'm saying. Anyone can spend as much INDEPENDENT political expenditures either in support or opposed to a candidate. This is how it should be. If I want to make a movie against a particular candidate, like the plaintiffs did in Citizens United, I should be able to. Congress shouldn't be able to stop me. That's what the 1st Amendment was designed to do: protect political speech. It shouldn't matter whether I do so as an individual or as an organization.

What I can't do, and what Citizens United does not permit, is for a person to donate as much as they want to a particular candidate.

You're worried about money in politics. So am I. But I am much more concerned about a government having the right to silence political speech. We should fix the system without trashing the first amendment.


Posted by Tom Cushing, a resident of Alamo
on Jul 18, 2012 at 8:07 am

Your profound allegiance is obviously not to the First Amendment, which got along very well without the money=expression position for some 220 years â€" it's to unlimited corporate campaign contributions, which were never allowed until CU in 2010. Would you give corporations the right to vote, too?

Further, do you really think there's Any person-of-means who cannot figure out how to make unlimited contributions to the candidate of choice, after CU? Tax guys are much better than That at finding loopholes.

I stand by my conclusion that CU facilitates a system that threatens democracy, and stops just short of legalized bribery.

As to the 2007 transcript, it's no secret that the Bush2 regulators were indifferent to the very laws they were supposed to be enforcing. That excerpt is just an example.


Posted by spcwt, a resident of Danville
on Jul 18, 2012 at 11:12 am

Reminds me of when Bush said democracy was threatened, so we need to start torturing people. Or when Obama said democracy was threatened, so he killed a U.S. citizen without a trial or any judicial oversight whatsoever.

Big government-types like you will always say we need to trample people's rights in order to "preserve democracy."

You know how those gun crazies are about their right to bear arms? I'm that way about the first amendment. No government is going to tell me what I can or cannot say about a politician. I'm glad the Supreme Court upheld that right in Citizens United.


Posted by Tom Cushing, a resident of Danville
on Jul 18, 2012 at 5:21 pm

Tom Cushing is a registered user.

Once again, the fact that your First Amendment was born in 2010 calls the steadfastness of your allegiance to its traditions into some doubt.


Posted by spcwt, a resident of Danville
on Jul 19, 2012 at 11:47 am

We're off topic.

But I'll gladly side with Justice Oliver Wendell Holmes' view that government should not limit the marketplace of ideas. As John Milton said, it's not necessary to limit speech. In a free society, truth will prevail.

Voters were smart enough to see through Meg Whitman's attempt to buy an election. And no amount of money will convince people to buy an Edsel.