[Vision2020] Time to Seriously Rethink

[Art Deco]

  [image: The New York Times] <http://www.nytimes.com/>

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July 6, 2012
Libor’s Dirty Laundry By JOE NOCERA

Here in the early stages of the Libor
scandal<http://dealbook.nytimes.com/2012/06/27/barclays-said-to-settle-regulatory-claims-over-benchmark-manipulation/?ref=londoninterbankofferedratelibor>—
and, yes, this thing is far from over — there are two big surprises.

The first is that the bankers, traders, executives and others involved
would so openly and, in some cases, gleefully collude to manipulate this
key interest rate for their own benefit. With all the seedy bank behavior
that has been exposed since the financial crisis, it’s stunning that
there’s still dirty laundry left to be aired. We’ve had predatory subprime
lending, fraudulent ratings, excessive risk-taking and even clients being
taken advantage of in order to unload toxic mortgages.

Yet even with these precedents, the Libor scandal still manages to shock.
Libor — that’s the London interbank offered rate — represents a series of
interest rates at which banks make unsecured loans to each other. More
important, it is a benchmark that many financial instruments are pegged to.
The Commodity Futures Trading Commission <http://www.cftc.gov/index.htm>,
which doggedly pursued the wrongdoing and brought the scandal to light,
estimates<http://cftc.gov/ucm/groups/public/@lrenforcementactions/documents/legalpleading/enfbarclaysorder062712.pdf>that
some $350 trillion worth of derivatives and $10 trillion worth of
loans are based on Libor.

With so much depending on this one critical interest rate, there shouldn’t
ever be a question about its reliability. Yet beginning in 2005, according
to the C.F.T.C. and the Justice
Department<http://www.justice.gov/opa/pr/2012/June/12-crm-815.html>,
derivative traders at Barclays, the too-big-to-fail British bank, with the
active involvement of traders at other yet-unnamed banks, persuaded their
fellow bank employees to submit Libor numbers that were shaded in ways that
would help ensure their trades were profitable. Even Robert Diamond Jr.,
the former Barclays chief executive who lost his
job<http://dealbook.nytimes.com/2012/07/03/chief-executive-of-barclays-resigns/?hp>over
the scandal, said that reading the traders’ e-mails made him
“physically
ill <http://www.bbc.co.uk/news/business-18708226>.”

In 2007, as the financial crisis was gathering steam, banks also began
submitting false Libor rates for a different reason. Libor, you may recall,
was a measure that gave the outside world a sense of how much trouble the
banks were in; the higher the rate required to borrow, the worse shape they
were assumed to be in. So Barclays — with what appears to be the
complicity<http://www.washingtonpost.com/world/europe/bob-diamond-former-barclays-chief-cites-regulators-role-in-rates-scandal/2012/07/04/gJQALdCmNW_story.html>of
British bank regulators — started submitting rates that were lower
than
the reality. Its executives said the purpose was to keep Barclays from
“sticking its head above the parapet.”

Even now, Barclays justifies the latter rationale as being a kind of
emergency measure brought on by the financial crisis. But the bank is wrong
about this. Submitting false data, for whatever reason, is a violation of
the law — not to mention a fundamental abuse of trust. Once again, it leads
one to believe that bankers feel neither the constraints of the law nor of
morality.

Which brings me to the second big surprise. Britain and America have
reacted to the Libor scandal in completely different ways. Britain is in an
utter frenzy over it, with wall-to-wall coverage, and the most respectable,
pro-business publications expressing outrage. Yes, Barclays is a British
bank, and the first word in Libor is “London.” But still: The Economist ran
a headline about the scandal that read, in its entirety,
“Banksters<http://www.economist.com/node/21558260>.”


Yet, on these shores, the reaction has been mainly a shrug. Perhaps we’re
suffering from bank-scandal fatigue, having lived through Bank of America’s
various travails, and the Goldman Sachs
revelations<http://www.nytimes.com/2012/03/14/opinion/why-i-am-leaving-goldman-sachs.html>,
and, most recently, the big JPMorgan Chase trading
loss<http://dealbook.nytimes.com/2012/06/28/jpmorgan-trading-loss-may-reach-9-billion/>.
Or maybe Libor is just hard to gets one’s head around.

But the Brits have this one right. They may not understand the intricacies
of Libor any better than we do, but they sense, powerfully, that banks have
once again made a mockery of the role that society entrusts to them.

“Why has the scandal created outrage in Britain? Because it truly is
outrageous,” said Karen
Petrou<http://www.fedfin.com/index.php?option=com_content&view=article&id=7&Itemid=9>,
the managing partner of Federal Financial Analytics. “They weren’t supposed
to be fixing that rate — no matter what the reason.”

She continued: “If I give you my money, I need to be able to trust you with
it. If you can only be trusted via regulation, then you might as well be a
utility. And if banks can’t be trusted to manage their trading desks, then
we need to rethink our whole model of banking.” Petrou is not an advocate
of returning to the days of Glass-Steagall, the Depression-era law that
separated investment banking and commercial banking. But with the Libor
scandal, she said, she could certainly understand the growing calls for it.

Barclays, of course, is hardly the only big bank that manipulated Libor for
fun and profit. It is simply the first to admit its wrongdoing and settle
with the government. The word is that just about every big bank is under
investigation for playing games with Libor, including JPMorgan Chase,
Citigroup and other American-based financial giants.

Which means there is going to be a lot more opportunities for Americans to
become outraged over this scandal. And, maybe, to finally summon the will
to change banking once and for all.


-- 
Art Deco (Wayne A. Fox)
art.deco.studios at gmail.com
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