Tuesday, July 10, 2012

Why LIBOR Matters

“Fraud is a crime in ordinary business — why shouldn’t it be so in banking?” ~George Osborne, British Chancellor of the Exchequer

An enormous fraud has come to light in London, affecting trillions of dollars quietly stolen from bank accounts and loan accounts worldwide. Money stolen from you. It involves a rate formula called LIBOR. The L stands for London, but the London rate sets bank to bank lending worldwide, and bankers have been rigging that rate, fiddling it, manipulating it to earn themselves trillions of illegal gains over the past decade. It helped trigger the financial collapse of 2007-2008 by phonying the numbers and hiding the weaknesses in large banks. This is the kind of corruption enabled by the relaxing of financial regulation ushered in by George W. Bush and by Republican power brokers like Senator Phil Gramm.

From The Economist:

"[Referring to LIBOR, the rating system that establishes interest rates for everyone who uses credit] "In reality, the system is rotten. First, it is based on banks’ estimates, rather than the actual prices at which banks have lent to or borrowed from one another. “There is no reporting of transactions, no one really knows what’s going on in the market,” says a former senior trader closely involved in setting LIBOR at a large bank. “You have this vast overhang of financial instruments that hang their own fixes off a rate that doesn’t actually exist.”

"A second problem is that those involved in setting the rates have often had every incentive to lie, since their banks stood to profit or lose money depending on the level at which LIBOR was set each day. Worse still, transparency in the mechanism of setting rates may well have exacerbated the tendency to lie, rather than suppressed it. Banks that were weak would not have wanted to signal that fact widely in markets by submitting honest estimates of the high price they would have to pay to borrow, if they could borrow at all."

In other words, only oversight and regulation (which Wall Street and the banks say they don't need) will keep them from stealing trillions from us.

Gretchen Morgensen of the New York Times: "Manipulating the Libor is a big deal because it affects the cost of money for almost everyone. The Libor is used to set rates on mortgages, credit cards and all manner of loans, personal and commercial. The amount of money affected by the phony rates is at least $500 trillion, British regulators have estimated."

Five hundred TRILLION.

"“We’re clean but we’re dirty-clean, rather than clean-clean,” an executive said in a phone conversation. Talk about defining deviancy down.

“Dirty clean” versus “clean clean” pretty much sums up Wall Street’s view of cheating. If everybody does it, nobody should be held accountable if caught. Alas, many United States regulators and prosecutors seem to have bought into this argument."

Interviewed in The Independent, Nobel Prize economist Joseph Stiglitz puts the scandal in its proper context. Isn't this what bankers do? Aren't bankers supposed to try to make money and profits? Yes, but... Corruption destroys the strength of an economy by diverting investments and activity away from producing goods and services and infrastructure to theft, to gaming weaknesses, to rigged gambling on rigged numbers.

"It's a textbook illustration," Stiglitz said. "Where there are these asymmetries a lot of these activities are directed at rent seeking [appropriating resources from someone else rather than creating new wealth]. That was one of my original points. It wasn't about productivity, it was taking advantage."

Elliot Spitzer knows this territory well. He used to investigate and prosecute these guys.

The Financial Times is by no means a leftist newspaper, but it is reporting this scandal very aggressively.

Gary Gensler, one of Obama's regulators, is one of the Good Guys trying to clean up the financial sector: “I don’t think the public should be left at risk of a trade association, with the most sophisticated, largest banks, setting a rate that’s so critical to our credit cards, our student loans, our mortgages... These benchmarks matter; we all lose if the markets aren’t reporting accurate information.”

One Financial Times columnist calls for getting rid of the current generation of leaders in the financial industry. He also calls for breaking up the big banks, because "Too Big To Fail" is also "Too Big To Jail."

Robert Reich does a good job of explaining why this should matter to average Americans, in The Guardian (a reliably good source of information on the corruption in markets. They also broke the story about how Rupert Murdoch's papers hacked into thousands of phones and corrupted Scotland Yard and the British government.)

"The typical saver or borrower on both sides of the Atlantic trusts that the banking system is setting today's rate based on its best guess about the future worth of the money. And we assume that the banks' guess is based, in turn, on the cumulative market predictions of countless lenders and borrowers all over the world about the future supply and demand for money.

"But if that assumption is wrong – if the bankers are manipulating the interest rate so they can place bets with the money we lend or repay them, bets that will pay off big for them because they have inside information on what the market is really predicting which they're not sharing with the rest of us – it's a different story altogether.

"It would amount to a rip-off of almost cosmic proportions – trillions of dollars that average people would otherwise have received or saved on their lending and borrowing that have been going to the bankers instead."

"It would make the other abuses of trust Americans have witnessed in recent years – predatory lending, fraud, excessively risky derivative trading with commercial deposits, and cozy relationships with credit-rating agencies – look like child's play by comparison."

Every honest economist, every honest banker, every honest politician, every honest journalist and reporter is taking this rigging of the financial markets, this enormous fraud, very seriously. The ones who are brushing it off or minimizing it or defending it or ignoring it are probably owned by the corrupt financiers themselves.

This fraud isn't confined to the London market. It affected trillions of transactions and resulted in many trillions of dollars defrauded from average households worldwide. It helped cause the financial collapse of 2007-2008, and has continued after that. The wizards of Wall Street continue to use this fraud to pay themselves billions in bonuses to this day.

“It is clear that what happened in Barclays and potentially other banks was completely unacceptable, was symptomatic of a financial system that elevated greed above all other concerns and brought our economy to its knees. Punish wrongdoing. Right the wrong of the age of irresponsibility.” ~George Osborne, British Chancellor of the Exchequer

It's an age of irresponsibility Obama is trying to end, and which the Republicans are determined to protect and extend.

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