When you think of the English, Justice and “Doing the Right Thing” they are almost synonymous. One has to think that near-failure of the Royal Bank of Scotland and Northern Rock during the 2007-2009 Financial Crisis was just an anomaly. Just a whiff of the Wall Street Flu. The British run Wimbledon, the Olympics and they get things right. Well maybe not.
LIBOR – 5 Facts
1)LIBOR is the London Inter-Bank Offered Rate.
2)LIBOR determines worldwide the prices and interest rates that people and corporations pay for loans or receive for their savings.
3)LIBOR is “a borrowing rate that is set daily by a panel of banks for ten currencies and for 15 maturities. The most important of these, three-month dollar LIBOR, is supposed to indicate what a bank would pay to borrow dollars for three months from other banks at 11am on the day it is set. The dollar rate is fixed each day by taking estimates from a panel, currently comprising 18 banks, of what they think they would have to pay to borrow if they needed money. The top four and bottom four estimates are then discarded, and LIBOR is the average of those left. The submissions of all the participants are published, along with each day’s LIBOR fix.”
4)LIBOR is used as the benchmark rate in millions of financial agreements/contract/instruments amounting hundreds of trillions of dollars every year.
5)LIBOR has been set fraudulently since the 1980’s but only by a 1-2 basis points. However, in the past 4-6 years daily fixes have seen 200-300 basis point differences.
Barclays bank just paid a $450million dollar fine,losts its CEO plus Chairman and is co-operating with British and American regulators on investigations of other wrongdoing among the 16-20 banks that set the LIBOR and its Euro equivalent, the EURIBOR.
The Libor crisis comes on the tails of the Murdoch hacking scandal with the very highest government offices including Prime Ministers being implicated. But the LIBOR scandal, though it smacks of the very same media scandal in the highest British government ofices, tops the Murdoch malaise because it runs is so deep, is so fundamental, and so confirming of the popular notion that the big financial institutions are a bunch of Banksters – white collar criminals of the most deviant kind working in hand with their political vassals – that even the normally tut-tut British intellectual press is up in arms.
Financial Times – The Barclays affair may lack the spice of some recent banking scandals, involving as it does the rather dry “crime” of misreporting interest rates. But few have shone such an unsparing light on the rotten heart of the financial system.
BBC News – The cynical greed of traders asking their colleagues to falsify their Libor submissions so that they could make bigger profits – has justifiably shocked and angered people, in particular when we are facing hard economic times provoked by the financial crisis.
The Economist –“The attempts to rig LIBOR (the London inter-bank offered rate), a benchmark interest rate, not only betray a culture of casual dishonesty; they set the stage for lawsuits and more regulation right around the globe…. despite the risks of banker-bashing, a clean-up is in order, for the banking industry’s credibility is shot, and without trust neither the business nor the clients it serves can prosper.”
Martin Wolf at FTBlogs –My interpretation of the Libor scandal is the obvious one: banks, as presently constituted and managed, cannot be trusted to perform any publicly important function, against the perceived interests of their staff. Today’s banks represent the incarnation of profit-seeking behaviour taken to its logical limits, in which the only question asked by senior staff is not what is their duty or their responsibility, but what can they get away with.
As my colleague John Kay, has frequently pointed out, such behaviour, which might seem to be the logical consequence of profit-maximisation, is incompatible with the survival of a sophisticated market economy. Without trust in the probity of those one deals with, a host of potentially profitable long-term arrangements will collapse. This is particularly true in banking, Trust is not an optional extra in banking, it is, as the salience of the word “credit” to this industry implies, of the essence.
It is difficult to know how to restore not just the reality, but the perception, of trustworthiness, to this industry. But part of the answer must be a separation of the self-interested trading culture of today’s investment banking from the service-oriented culture of old-fashioned commercial banking. That has always seemed to me to be a strong argument for the ring-fencing of retail from investment banking that the ICB proposed. [This latter regulation separating Investment Banking from Commercial Banking is the old Glass Steagall Act that was slowly but surely dismantled in the US].
TheDailyMail – can be counted on to set the consequences in NYPost-like bold bawling – Scandal that could ruin banking giants: U.S. lawyers prepare to sue financial firms for hundreds of BILLIONS over global interest rate-fixing.
Here in the US John Downie at theWashington Post states the case succinctly:
When did you stop believing Wall Street’s promises that the latest banking scandal was a one-off and would never happen again? For many who were still credulous, the tipping point may have come this week, with the London interbank offered rate (Libor) rigging scandal…
The affair first hit the public spotlight last week, when Barclays Bank agreed to pay a $450 million fine to U.S. and U.K. regulators. But Barclays is only the first domino: Between 15 and 20 banks have been named in various Libor-rigging investigations or lawsuits throughout Europe and North America. “This is the banking industry’s tobacco moment,” the chief executive of a multinational bank told the Economist. “It’s that big.” …
One hopes that even those most inclined to give the big banks the benefit of the doubt would recognize the common trait running through these excuses: cowardice. It takes little effort or intelligence to make a profit when you’re setting a rate and betting on that rate at the same time, or to scam cities when you’re bribing city officials, or to sell millions of dollars in worthless bonds when you’ve neutered the rating industry that is supposed to grade them. And what does it say about the character of our financial “titans” that they still scramble to socialize risk through Too Big to Fail, to foist false blame for the crisis on the housing market, and to duck and dodge around every new attempt to return some accountability to the industry? The Libor scandal is teaching once again (and to an ever-wider audience) that lesson the big banks most fear people taking to heart: Their industry, right now, is rotten to the core.
Summary
Lets take stock of the financial scandals for 2012 so far:
Winter 2012
Greek Banker Charged – $1B in fraud and embezzlement charges against head of Proton Bank
Swiss banks – draw in over $100B in latest quarter despite secrecy blows
Goldman Sachs Resignation – Executive Greg Smith says ” the environment now is as toxic and destructive as I have ever seen it.”
Obama, Politicians Refuse to Return Ponzi schemer Stanfords political contributions
John Corzine – ordered $200M of MF Global missing funds transferred to JPMorgan
Jenner Report on Lehman Brothers Bankruptcy– Ernst Young auditors and bank fail to report massive and illegal Repo 105 transactions; no legal actions taken by US government
Olympus Corporation – with accounting firm Ernst Young, Olympus was able to hide for several quarters hundreds of millions in losses – resulting in $1.7billion of investor losses
Spring 2012
Bankrupt Irish Billionaire – Sean Quinn escapes jail term despite not disclosing $100s of millions of hidden assets versus $3.3 billion of claims
Kerviel say Management Knew – In $6.1B losses at French Bank SocGen who is responsible is on trial
Greek Investor Sinks Cyprus Bank – 2B Euros in losses are absorbed by Cyprus bank for its Greek major owner
JPMorgan Dervative Losses – Instead of $2B in reckless derivative trading losses could exceed $9B
Florida Robosigning Case – Florida Supreme Court will decide Foreclosure Robosigning case with $billions on the line
HSBC’s Money Laundering – for 2nd time HSBC is found to be deliberately fraudulent in massive DC money laundering probe
CitiGroup – allowed to promote executive responsible for misleading research reports
What do we see here – a continuing stream of multi $billion financial scandals, a daring by the finance community for the regulators to try and prosecute and make it stick, continued reliance on TBTF-Too Big To Fail free federal insurance, ridiculously low interest rates which Financial Institutions can make triple their money on, and a paltry $600Million in campaign funding by Financial Institutions to the politicians from Obama on down through Congress to State Governors and lesgislators of both parties to guarantee that no prosecutions occur and the good times continue to roll. At $3.3 trillion that $600million looks like a massive gravy train ROI of over 4000%.
So does this look like the financials regulations like the 2010 Dodd-Frank law have made any impact. No, because the culture is protected. There have been no prosecutions in the US or the UK that have put any of the perpetrators of the 2007-2009 Financial Crisis into jail. The worst consequence has been $0.5B fine so far in the LIBOR case. But the LIBOR case proves 4 points:
1)the culture in high finance circles has been corrupt f0r at least 20 years;
2)the vaunted free and efficient financial market measures and mechanisms have been manipulated and corrupted right at the very basic core – interest rate settings;
3)clients cannot expect any adherence to Fiduciary Trust by their financial advisors – just ask Goldman Sachs clients;
4)this is all aided and abated by not so much the regulators but their political masters who have been bought off.
Goldman Sach’s executive Greg Smith got it right on his resignation not just for his company but large scale finance in general – ” the environment now is as toxic and destructive as I have ever seen it.” but what he missed is the extent of the disease – it goes to the core of good governance as the Financial Elites have lead the way to a deeply instilled Bautocracy. Financial regulation and Financial Justice is being bought around the World in influence “access” and peddling of the highest order. The Rule of Law is in jeopardy.